What Is the NAHB/Wells Fargo Housing Market Index (HMI)?

What Is the NAHB/Wells Fargo Housing Market Index (HMI)?

Let me explain the NAHB/Wells Fargo Housing Market Index, or HMI, directly to you. It's a monthly sentiment survey of members from the National Association of Home Builders (NAHB). This index measures how builders of U.S. single-family homes feel about the market, and it's a key indicator for the housing sector. Since housing is a major capital investment that drives spending on things like appliances and furnishings, indices like this help you monitor the overall economy's health.

Key Takeaways

You should know that the NAHB/Wells Fargo Housing Market Index acts as a widely followed measure of sentiment among U.S. builders of single-family homes. In the survey, builders rate current single-family sales, their sales prospects for the next six months, and the traffic of prospective buyers. When the HMI reads above 50, it shows a generally positive view and outlook in the industry. The three component indices of the HMI are seasonally adjusted and weighted to best correlate with housing starts over the next six months, based on historical data.

Understanding the NAHB/Wells Fargo Housing Market Index (HMI)

The National Association of Home Builders is a federation with over 700 state and local associations and 140,000 members. About one-third of them are home builders and remodelers, while the rest work in related areas like mortgage finance and building materials supply. NAHB builders handle around 80% of the new homes built in the U.S.

Since 1985, the HMI has come from a monthly survey of NAHB builders, which was getting about 400 responses back in 2007. When builders fill out the survey, they rate housing market conditions and their outlook based on recent experience.

The HMI is a weighted average of three diffusion indexes, ranging from 0 to 100. If the reading is above 50, it means the industry generally sees the market favorably. The index hit a record low of 8 in January 2009 and a high of 90 in November 2020.

Warning on Mortgage Lending Discrimination

I need to point out that mortgage lending discrimination is illegal. If you believe you've faced discrimination based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, take action. You can file a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

Calculating the Housing Market Index

Here's how the HMI gets calculated: it's a weighted average of three component indices—current single-family sales, the outlook for sales over the next six months, and traffic of prospective buyers. Each month, builders rate current sales and the six-month outlook as good, fair, or poor, and buyer traffic as high to very high, average, or low to very low.

A diffusion index for each is figured using the formula (good - poor + 100) / 2 for present and future sales, and (high/very high - low/very low + 100) / 2 for buyer traffic. Each index is then seasonally adjusted and weighted to produce the HMI. The weights are 0.5920 for present sales, 0.1358 for future sales, and 0.2722 for traffic, chosen from historical data to maximize correlation with housing starts over the next six months.

The Housing Market Index as an Economic Indicator

The HMI correlates closely with U.S. single-family housing starts, which count the number of privately owned homes where construction began in a given month. Housing starts are a vital economic indicator, reported monthly by the U.S. Census Bureau.

As a measure of home builder sentiment, the HMI gives you useful insights into the near-term direction of housing starts. It's released at 10 a.m. EST, usually on the 11th business day of the month, right before the Census Bureau's housing starts data.

Historically, the HMI has tracked housing starts and building permits closely. However, its full recovery from the 2008-2009 financial crisis has outpaced the rebound in housing starts.