On Tuesday, there was a modest setback on the housing front as the National Association of Home Builders' Housing Market Index unexpectedly. Dropping to 15 from its December rating of 16, the index reflected homebuilder concerns about the uncertain job market and the large inventory of foreclosed homes.At 15, the index reached its lowest level since June. A Bloomberg News economists' survey had expected the index to rise to 17 in January; it was at 19 in September, and it hit a cycle-low of 8 a year ago in January 2009.

The NAHB Housing Market Index measures builder perceptions of current single-family sales, sales expectations for the next six months, and the traffic of prospective buyers. Readings over 50 indicate that more builders view sales conditions as good than poor.

"At this point, home builders have done everything we possibly can to set the stage for a housing recovery -- we've thinned our inventories, we've kept new construction to a minimum, and we've fought for and achieved a great new buying incentive with the extension and expansion of the home buyer tax credit," NAHB Chairman Joe Robson said, in a statement.

Two of Three Components Drop

Two of the three components of the index fell in January. The current sales conditions component fell 1 point, dropping to 15, and the component gauging traffic of prospective buyers fell 1 point to 12. Meanwhile, the six-month sales expectations component remained unchanged at 26.

Although not as telling as the U.S. Commerce Department's housing starts and new/existing home sales or the S&P/Case-Shiller Home Price Survey, the NAHB index remains popular with economists and market analysts because of the information on builder sentiment that it provides. Essentially, it offers a window into the perception and confidence levels of builders -- clues that predict activity fluctuations in the housing sector.

Further, economists follow U.S. housing activity because the sector does not operate in a vacuum. When homes are sold, homeowners tend to buy durable goods and big ticket items for the new home. These sales translate into good news for the economy and a bullish outlook for the U.S. stock market.

Still, despite the index's decline, January's dip most likely will not be enough to change the popular belief that the U.S. housing sector is stabilizing. Moreover, most economists say the federal government's recently extended/expanded income tax credit for home buyers ($8,500 for first-time buyers, $6,500 for existing home owners through April 30), and comparatively low interest rates have played and will continue to play a role in that healing.

Housing Analysis

Given the downtrend since June, this unexpected decline in the NAHB housing market index can't be considered a blip. However, given other, more telling indicators that are pointing to stabilization, the bias remains tipped in favor of an improving housing sector.

That said, if the NAHB index continues to decline as we headinto spring -- a period when builder activity historically picks up -- it would be a sign that builders are not confident about the economic expansion's ability to generate increased home sales and decrease the large inventory of new/existing homes on the market.

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