By RYAN TAYLOR

Just when you thought the market for new homes couldn’t get any worse, it did.

The National Association of Home Builders (NAHB)/Wells Fargo January builder sentiment index dropped to 8 from 9. While the homebuilders were setting records for new home sales in 2005 and 2006, they’re now setting records for the lowest confidence on record, as 8 breaks last month’s record low of 9.

The homebuilders are very clear on what needs to happen to bring back their confidence and revive the market for new homes (Hint: It has nothing to do with building homes that people want to live in for the right price.)

“Conditions in the nation’s housing market aren’t getting any better, and they aren’t going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market.” NAHB Chairman Sandy Dunn said.

One of the biggest reasons we are in this housing crisis is that builders put millions of buyers in homes they couldn’t afford. Through questionable relationships and kickbacks, builders partnered with lenders to encourage buyers to stretch beyond their means. This common practice during the boom created a massive over-supply of homes which has yet to be worked through.

As a result, homebuilders are left with basically two choices – 1) offer homes at prices that are reflective of the current market conditions or 2) do not sell any homes and plead for Uncle Sam to help them.

Needless to say, they’re not going for option number one because it will put most of them out of business. Furthermore, the NAHB seems delusional on why people are not buying their homes.

“Qualified buyers are clearly in the wings but they’re looking for a significant signal from the federal government that now is the time to return to the market” NAHB Chief Economist David Crowe said.

This statement makes the assumption that qualified buyers are not in the new home market because the government needs to give them some kind of divine signal to know when to buy. As an alternative explanation, I think qualified buyers are not buying new homes because they’re far away from job centers, listed above market and were built by companies that frequently stop work on projects halfway through– existing residents be damned.

Until one of the major publicly traded home builders goes out of business, we are not near the bottom in the housing cycle.

By RYAN TAYLOR

Home builders aren’t feeling very confident. And for good reason.

The National Association of Home Builders shared their sentiment index for November Tuesday and the reading was the lowest since they began keeping track. The index dropped 5 points from 14 in October to 9 this month – a 10 point drop from a year earlier. The index is based on a survey of 422 residential developers nationwide and a reading under 50 is viewed as negative sentiment.

Unlike many other data points provided by various real estate trade associations, the NAHB index has been significantly more accurate in conveying the general direction of the market. With a confidence number of 9, there’s no way to sugar coat what’s going in the marketplace.

Home values continue to trend down and nobody feels the pain more than the homebuilders, whose top line is tied directly to how much they can sell homes for. Their business has come to a grinding halt and we believe there will be no sustainable bottom in the housing market until the industry consolidates. Their sentiment reinforces our view point: There’s just not enough business for tens of nationwide homebuilders, each building effectively the same product.

NAHB Chairman Sandy Dunn told Bloomberg, “We are in a crisis situation, tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back.” Indeed.

The NAHB also provided an index for expected sales over the next six months, which remained at 19. While this number reflects negative sentiment, it is markedly more positive than the overall sentiment, largely because many homebuilders still believe the government ongoing financial market bailout will successfully unfreeze the credit markets. Again, the NAHB index gives an indication of the overall market sentiment as most market participants are hoping the near future will be brighter than today.

Frankly, the homebuilder sentiment cannot get much lower than it is right now. However, this doen’t mean it will rise any time soon. When it does, a sustained trend based on fundamentals – not bailouts – will be required to indicate a true bottom to the housing market. Given the vast amount of uncertainty still plaguing the market, its unlikely a meaningful improvement will be seen in the next six months.

The bottom in housing is still a ways off.