DEFINITION of 'NAHB/Wells Fargo Housing Market Index'

An index based on a monthly survey of members belonging to the National Association of Home Builders (NAHB) that is designed to measure sentiment for the U.S. single-family housing market. The NAHB/Wells Fargo Housing Market Index (HMI) is a widely watched gauge of the outlook for the U.S. housing sector.

The survey on which the index is based asks the NAHB’s 140,000-plus members to rate market conditions for current new home sales and in the next six months, as well as prospective buyer traffic for new homes. The HMI is a weighted average of separate diffusion indexes for these three series. Its reading can range between 0 and 100; a reading over 50 indicates that more builders view sales conditions as good compared with those who view them as poor.

BREAKING DOWN 'NAHB/Wells Fargo Housing Market Index'

The HMI is calculated as follows: The two series for market conditions for current new home sales and in the next six months are rated on a scale of Good, Fair and Poor, while the buyer traffic series is rated on a scale of High/Very High, Average and Low/Very Low. A diffusion index is then calculated for each series by applying a formula, after which each resulting index is seasonally adjusted and weighted to generate the HMI.

The HMI is produced by the Economics arm of the NAHB, one-third of whose members are home builders and/or remodelers, with the others in closely related sectors such as building materials, housing finance and real estate sales. NAHB’s builder members annually construct about 80% of the new homes built in the U.S.

The HMI displays a close correlation with U.S. single-family housing starts, which refers to the start of construction on privately-owned homes. Housing starts data is a key indicator of how the U.S. economy is faring and is supplied monthly by the U.S. Census Bureau. As the HMI is a gauge of homebuyers’ intentions, it can provide valuable clues about the near-term direction of housing starts. The HMI is released monthly at 10am EST on the day before housing starts data is released by the Census Bureau, which is generally around mid-month.

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