Housing Markets Show Gradual Improvement: What the Latest Leading Markets Index Data Means for Builders

For home builders tracking where to invest their resources, the monthly NAHB/First American Leading Markets Index (LMI) offers one of the most reliable snapshots of housing market health across the United States. The latest data reveals that housing markets continue to show gradual improvement, with the national average reaching 86 percent of normal economic and housing activity. While this signals progress, it also underscores that the recovery remains uneven across metro areas, creating both opportunities and cautionary signals for builders planning their next projects.

The LMI shifts the focus from identifying markets that have recently begun to recover to identifying those areas that are now approaching and exceeding their previous normal levels of economic and housing activity. By scoring more than 350 metro areas based on permits, prices, and employment, the index provides a data-driven foundation for strategic decisions in land acquisition, community development, and sales planning.

Understanding the Leading Markets Index and How It Works

The Leading Markets Index was developed by the National Association of Home Builders in partnership with First American Title Insurance Co. It replaces earlier gauges such as the Improving Markets Index by offering a more complete picture of where markets stand relative to their historic normal baselines.

How the LMI Score Is Calculated

The index evaluates each metro area by taking the average of three critical components over the trailing twelve months and dividing them by their annual average during the last period of normal growth:

• Single-family building permits – measured against the 2000 to 2003 baseline, representing the last period of stable, normal housing production
• Home prices – based on Freddie Mac house price appreciation data, also benchmarked to 2000 to 2003
• Employment levels – benchmarked to 2007, the last year of normal employment before the recession took hold

These three components are averaged to produce a single score for each market. An index value above 1.0 indicates that a market has advanced beyond its previous normal level of economic activity. A national score is calculated using the same methodology applied to national-level data.

What a Score of 0.86 Means for Builders

The national LMI score of 0.86 means the average metro area is operating at 86 percent of its normal capacity. For context, this represents a meaningful recovery from the depths of the housing downturn but still leaves room for further improvement. Builders interpreting this number should consider that:

• A score below 1.0 does not necessarily signal weakness – it reflects the gap between current activity and a historic normal baseline that itself may need recalibration given demographic and economic shifts
• Markets closer to or above 1.0 typically offer stronger demand dynamics for new home sales
• The trajectory matters more than the absolute number – gradual upward movement over consecutive months indicates sustainable recovery

Markets Leading the Recovery and What Drives Their Success

The latest LMI data shows that 56 of the roughly 350 metro areas assessed have returned to or exceeded their last normal levels of economic and housing activity. This represents a net gain of two markets from the previous month, continuing a slow but steady upward trend.

Major Metros at the Top of the List

Among the largest metro areas, Baton Rouge, Louisiana, leads with an LMI score of 1.42, meaning its housing and economic activity is 42 percent above its last normal market level. Other major metros that have exceeded their normal baselines include:

• Honolulu, Hawaii – sustained demand driven by limited land supply and military-related employment
• Oklahoma City, Oklahoma – a diversified economy anchored by energy, aerospace, and healthcare sectors
• Austin and Houston, Texas – both benefiting from strong job growth, business relocations, and population inflows
• Harrisburg and Pittsburgh, Pennsylvania – more modest outperformance but stable, with diverse economic bases

Smaller Markets with Exceptional Performance

Smaller metros are showing even more dramatic recoveries, with many posting scores of 2.0 or higher. Odessa and Midland, Texas, both boast LMI scores above 2.0, meaning their markets are now at double the strength they exhibited before the recession. The energy sector is the primary driver in these markets, producing solid job growth and economic expansion that fuels housing demand.

Other top-performing smaller metros include:

1. Casper, Wyoming – energy sector strength supports construction employment and permits
2. Bismarck, North Dakota – oil and gas activity continues to generate housing demand
3. Grand Forks, North Dakota – anchored by the University of North Dakota and regional healthcare

A key insight from the data: 48 of the 56 markets at or above normal levels have populations under 500,000. This pattern confirms that smaller, resource-driven markets have recovered faster than many large coastal metros, challenging the assumption that builders should focus exclusively on major population centers.

What This Means for Market Selection

For builders evaluating where to expand or enter new markets, the LMI offers a screening tool. Markets with scores above 1.0 and sustained upward momentum warrant serious consideration. Those in the 0.85 to 0.99 range may represent opportunities to establish a presence before competition intensifies. Builders can use this data alongside local knowledge to identify markets where pent-up demand is likely to translate into sales.

Employment, Permits, and Prices: The Three Pillars of Market Health

The LMI’s value lies in its composite approach. By combining employment data from the Bureau of Labor Statistics, house price appreciation from Freddie Mac, and single-family housing permits from the U.S. Census Bureau, it offers a balanced view that no single metric can provide.

Employment Trends as a Leading Signal

Employment is often the most forward-looking component of the index. Markets where job growth is concentrated in sectors with above-average wages tend to generate stronger housing demand. The 2007 baseline for employment reflects the peak of the last expansion, and markets that have regained or surpassed that level typically exhibit:

• Lower unemployment rates relative to national averages
• Diverse industry bases that reduce vulnerability to sector-specific downturns
• Population inflows driven by job opportunities rather than affordability alone
• Rising household formation rates, particularly among younger workers

Permit Activity as a Supply Indicator

Single-family building permits serve as a direct measure of builder confidence and market activity. When permits are rising, it signals that builders see enough demand to justify new starts. When they lag in a market with strong employment and price appreciation, it may indicate land constraints, regulatory hurdles, or entitlement delays that could create supply shortages.

The 2000 to 2003 baseline for permits captures a period of relatively stable production before the boom-bust cycle. Markets that have returned to or exceeded these levels have effectively replaced the production capacity lost during the downturn.

Home Price Trends and Affordability Dynamics

Home prices in the LMI are measured using Freddie Mac data, which captures both appreciation and depreciation trends. Markets where prices have rebounded to normal or above-normal levels generally have:

• Limited inventory relative to demand
• Above-average household incomes that support higher price points
• Favorable mortgage availability for qualified buyers
• Low foreclosure rates that prevent distressed pricing from dragging down values

However, builders should monitor price growth carefully. Markets where prices have risen significantly faster than incomes may face affordability constraints that eventually cap demand. The LMI’s price component provides a useful cross-check against overheated conditions.

Strategic Takeaways for Home Builders Navigating a Gradual Recovery

The gradual improvement documented by the LMI creates a specific set of strategic implications for builders. Neither a boom nor a bust, the current environment rewards disciplined execution and data-driven decision-making.

Opportunities in the Current Market

The most compelling opportunities lie in markets that are approaching but have not yet exceeded their normal benchmarks. These metros offer growth potential without the elevated land costs and competition found in fully recovered markets. Builders should consider:

• Market scoring between 0.85 and 0.99 – these metros are close to normal but may still offer attractive land acquisition terms
• Markets with improving LMI trajectories – three to six months of consecutive improvement signals sustainable momentum
• Secondary markets near top-performing metros – spillover demand from overheated primary markets can create opportunities in adjacent communities
• Markets with strong employment but lagging permits – supply constraints may create pricing power for builders who can navigate entitlement challenges

Risks to Monitor

While the recovery is encouraging, builders should remain vigilant about several risk factors that could slow or reverse progress:

1. Interest rate sensitivity – rising mortgage rates can disproportionately affect first-time buyers and move-down buyers, two key demographics in recovery markets
2. Labor availability – markets approaching normal activity levels may face tighter subcontractor and trade labor markets
3. Material cost volatility – supply chain disruptions or tariff changes can erode margins even in otherwise healthy markets
4. Regulatory headwinds – zoning changes, impact fee increases, and permitting delays can slow production in recovering markets

Building a Data-Driven Market Strategy

The LMI is one of several tools builders should incorporate into their market planning. Combining the index with local market knowledge, builder surveys, and demographic trend analysis creates a more complete picture. Builders who rely on data rather than anecdotal evidence are better positioned to identify both opportunities and risks before they become apparent to the broader market.

For builders who track the improving markets index regularly, the transition to the Leading Markets Index provides a more nuanced view of where the recovery stands. Pairing this with a dedicated housing market recovery tracker allows for month-to-month monitoring of trends that directly affect production planning. Builders who track the right housing market indicators consistently outperform peers who react to conditions after they change. Understanding how to read housing starts data is an essential skill for any builder making land and capital allocation decisions.

The gradual improvement in housing markets across the United States is a positive signal for builders willing to do the analytical work required to find the best opportunities. Markets are not recovering uniformly, and the gap between top-performing metros and those still below normal creates both risk and reward. Builders who understand the data, monitor the trends, and execute with discipline will be best positioned to capitalize on the continuing recovery.