The HMI is constructed by combining the values for three sub-indexes which measure current sales of homes, traffic of prospective buyers at new home sites, and expected sales over the next six months. For this month's survey, current sales dropped just 1 point, the traffic index dropped by 5 points, and expected sales rose by 4 points, for a net loss of 2 points. An HMI reading of 60 means that 6 out of 10 survey respondents thought that market conditions were good.

The level of the current sales index shows that actual sales in the recent survey period are still keeping up with the brisk pace of recent months. The Government's new home sales report a couple weeks ago showed a monthly sales rate of more than 700,000 for each of the four months ending in April. That was the first time that sales were so consistently strong since the final months of 1993. Today's NAHB report suggests that this earlier strength has persisted through May and on into June.

The drop in traffic reveals that buyer interest may be waning, probably due to the 1.3 percent rise in mortgage interest rates in recent months. This may be a sign that sales will slow down from the present pace. The expectations rise seems to be at odds with the fall off in traffic. I would be inclined to put more trust in the traffic data since it is based on real-time observations rather than guesses about the future.

New home sales are an important indicator of economic activity -- one of the first to turn when the economy retracts or expands. Today's NAHB report indicates that the recent recovery in economic activity is still on course.

Byline: Lafferty (MF Merlin)