Two measures of the housing market were released this week and each shows that, at best, builders are remaining cautious; at worst they are showing a bit of despair.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for June reported that builders' confidence in the market reached the lowest point in over 25 years.

The HMI measures builders' reading of the single family real estate market in three areas: their perceptions of current sales and their expectations for the next six months on a scale ranging from poor to good and their feelings about current buyer traffic on a six point axis from very low to very high. Any score above 50 on each of the three points indicates that builders are more confident in the market than not. A combined index of the three indices is also constructed, again with any score above 50 considered positive.

All three components and the aggregate declined in June. The index measuring current sales lost two points from May's score, totaling 29. The index of perceptions for the next six months also fell two points to 39 and the index gauging current buyer traffic was down one point to 21. It was the total HMI, however, that revealed the lack of confidence builders are currently feeling. At 28 it was the lowest score since February 1991.

NAHB President Brian Catalde said "Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of non-price incentives to work down sizeable inventory positions."

According to NAHB Chief Economist David Seiders, "It's clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage markets, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates. Homes sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year. As a result, we expect housing to exert a drag on economic growth during the balance of 2007."

And Mr. Seiders' projections were pretty much borne out by the joint release of the U.S. Department of Housing and Urban Development/U.S. Census Department report on housing starts and building permits. While permits issued in May for all privately owned housing units were up 3 percent from the revised April rate to 1,501,000, the figure was down 21.7 percent from the revised figures for May 2006. The April to May increase did not come from permits pulled for single family houses; those were at a seasonally adjusted rate of 1,056,000, down 1.8 percent from April. Permits for projects with five or more units picked up the slack, increasing 17 percent from the previous month and were even up 1.1 percent from May 2006.

Housing starts dropped 2.1 percent from the revised April estimate of 1,506,000 units to an adjusted annual rate of 1,474,000. This is 24.2 percent lower than the revised May 2006 rate of 1,944,000 units. Single family home starts were down 3.4 percent from the previous month while projects with five or more units were started at a rate 3.8 percent higher than in April.

The inventory of permits that have been pulled but for which construction has not started increased less than 1 percent from April to May and was actually down 10.6 percent from the permit backlog one year earlier.

Regionally there was not a lot of variation in the rate of permits pulled. The Northeast had the largest negative change; -6.5 percent from the previous month while the Midwest was up 5.4 percent. When it came to housing starts, however, the West continued to fall way off of the pace, down 19.7 percent from the previous month. Both the Northeast and the Midwest recorded starts slightly in excess of 15 percent better than April levels.