U.S. homebuilder sentiment unexpectedly declined in August for the first time this year as high mortgage rates deterred prospective buyers.
The National Association of Home Builders/Wells Fargo gauge decreased six points to a three-month low of 50. The figure was below all estimates in a Bloomberg survey of economists.
Builder confidence had been on a tear this year as homeowners, reticent to move and relinquish their low borrowing costs, have kept resale inventory limited and encouraged buyers to seek out new construction. The latest figures suggest high mortgage rates — more than double where they were at the end of 2021 — are starting to bite into that demand.
“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” NAHB Chairman Alicia Huey said in a statement.
After months of having the upper hand, higher rates are also causing more builders to use sales incentives to attract buyers. Sentiment fell across all four major U.S. regions.
The indexes of current sales and prospective buyer traffic both decreased for the first time this year, while the expected sales gauge declined to the lowest level since April.
Data on July housing starts and building permits are due Wednesday.
Homebuilder confidence declined for the first time this year in August, reflecting the difficulties of 7% mortgage rates and reduced housing affordability.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report showed that builder confidence fell 6 points from July to a reading of 50.
The HMI index is a monthly survey that gauges NAHB members’ perception of current single-family sales, expected sales for the upcoming six months, and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that builders view conditions as favorable.
“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said Alicia Huey, NAHB Chairman and a homebuilder from Birmingham, Alabama.
Huey added that while housing affordability remains a persistent challenge, demand for new construction has been aided by a lack of resale inventory. Many homeowners are locked into low-rate mortgages and are staying put, she said.
In July, shelter inflation accounted for 90% of the Consumer Price Index’s reading of 3.2%, contributing to housing affordability challenges. The NAHB said builders need to be constructing more multifamily and single-family homes to cut into the decade-long inventory shortage.
“The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units,” said Robert Dietz, the NAHB’s chief economist.
Additionally, high mortgage rates called for the return of sales incentives in August. After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August. The share of builders using incentives to bolster sales was 55% in August, higher than in July (52%). However, it was still lower than in December 2022 (62%).
The NAHB also reported that all three major HMI indices posted declines in August. Homebuilders’ gauge of current sales conditions fell 5 points to 57. The gauge measuring traffic of prospective buyers declined 6 points to 34. And the component charting sales expectations over the next six months fell 5 points to 55.
The three-month moving averages for HMI were mixed across the four major regions. The West edged down a single point to 50, the Midwest and the South remained unchanged, while the Northeast rose 4 points to 56.
In spite of a falling homebuilder confidence index, the Wall Street Journal reported this morning that Warren Buffett’s Berkshire Hathaway made a fresh bet on U.S. homebuilders in the second quarter. The company revealed new positions in D.R. Horton , NVR and Lennar, cumulatively worth more than $800 million at the end of June, when rates were still high but not quite 7%.
Homebuilder stocks have been at record highs in recent months.
Rising rates took a toll on builder confidence in August. The National Association of Home Builders (NAHB) said the NAHB/Wells Fargo Housing Market Index (HMI) dropped 6 points as rates neared 7 percent. The HMI, a measure of home builder confidence in the market for newly constructed homes, had risen for seven straight months but is now at 50.
Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
All three major HMI indices posted declines in August. The HMI index gauging current sales conditions fell 5 points to 57, the component charting sales expectations over the next six months declined 4 points to 55, and the gauge measuring traffic of prospective dropped from 40 to 34.
Deitz said that declining customer traffic is likely a result of the 7.7 percent rise in shelter inflation over the last year. It accounted for a striking 90 percent of the July Consumer Price Index reading of 3.2 percent. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units,” he said.
The NAHB monthly survey of its new home builders also shows that rising rates are again pushing the use of sales incentives. After dropping from 31 percent to 22 percent between March and July, the share of builders cutting prices to bolster sales ticked up to 25 percent in August although the average price decline remained at 6 percent. Overall, the use of sales incentives increased from 52 percent of builders in July to 55 percent this month.
Looking at the three-month moving averages for regional HMI scores, the Northeast increased 4 points to 56, the Midwest and South were both unchanged at 45 and 58, respectively, and the West edged down a single point to 50.
For the second week in a row, mortgage applications faltered slightly, falling 0.6% from the week prior, according to a report from the Mortgage Bankers Association.
Purchase applications took a hit last week, falling 2% from the week prior. However, they remained 26% higher than this same time last year. Refinances remained relatively stable over the past week, but are 74% higher than the same week a year ago.
Joel Kan, MBA’s vice president of economic and industry forecasting, pointed to a rise in mortgage rates last week for why conventional and government purchase activity took a step back. The 30-year fixed rate climbed two basis points to 3.02, the highest since late September.
“Despite the uptick in rates, refinance activity held steady, with FHA refinance applications posting a 17.6 percent increase, helping to offset declines in the other loan types,” said Kan.
Given the ongoing housing market recovery, Kan estimates homebuyer demand will remain strong through the Fall. That sentiment echoes recent data from the National Association of Home Builders that stated builder confidence posted it’s highest score in the survey’s 35-year history.
Here is a more detailed breakdown of this week’s mortgage application data:
The FHA’s share of mortgage apps increased to 11.8% from 10.7%.
The VA share of applications fell to 12.6% from 13.4%.
The USDA share of total applications fell to 0.5% from 0.6%.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) increased to 3.02% from 3%.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $510,400) increased to 3.33% from 3.3%.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 3.12% from the week prior.
The average contract interest rate for 15-year fixed-rate mortgages increased to 2.61 from 2.59%.
The average contract interest rate for 5/1 ARMs increased to 2.86% from 2.63%.
Rising housing affordability concerns are causing a slowdown in new home construction, according to a U.S. Commerce Department report published last week.
The report noted that single-family housing starts fell by 1.8 percent in October compared to the previous month.
“This month’s decrease in single-family starts isn’t a surprise given the drop in our builder confidence index,” said Randy Noel, chairman of the National Association of Home Builders. “Builders are showing caution as mounting housing affordability concerns are forcing some consumers to delay making a home purchase.”
Homes are getting more expensive because mortgage rates and home prices are rising faster than disposable incomes, according to UBS analysts.
“Housing affordability has dropped notably since peaking in 2012,” UBS said in a recent report.
Still, on an historic basis, housing remains fairly affordable, experts say. The current strong economy means that analysts are unsure of the exact reasons why housing is slowing down. Nonetheless, most are predicting that real estate markets will remain weaker in the first half of 2019.
“If you’re looking for a new, single-family home, the news this morning wasn’t good,” Robert Frick, corporate economist with the Navy Federal Credit Union, told HousingWire about the latest new-home numbers. “Builders are seeing a turn in the market for new homes and are less likely to build.”
Single-family housing starts began the year strong but weakened over the summer and are remaining soft, Robert Dietz, the NAHB’s chief economist, wrote in a blog post. “Despite this softness, 2018 construction volume is set to be the best since the downturn,” Dietz says. “A growing economy and positive demographic tailwinds are supporting housing demand as interest rates rise. However, policymakers should take note of the November decline in builder confidence as a sign that housing affordability conditions will weigh on the housing market going forward.”
Overall, construction in the new-home market did eke out a 1.5 percent increase in October, due to an uptick in multifamily housing starts, which include apartment buildings and condos. Multifamily starts rose 10.3 percent month over month in October. As such, housing starts were 5.6 percent higher than a year ago.
But builders remained concerned. Permits, a gauge of future housing production, registered a 0.6 percent drop in October to 1.26 million. Single-family permits dropped 0.6 percent, while multifamily permits decreased 0.5 percent.
Regionally, combined single-family and multifamily housing starts were strongest in October in the West, rising 13.5 percent month over month, and by 5.5 percent in the South, the Commerce Department reports. However, housing starts dropped 0.6 percent in the Midwest and by 4.8 percent in the Northeast last month.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Today the CensusBureau reported that in March 2021, new home sales were at a seasonally adjusted annual rate of 1,021,000. This number beats estimates.
Additionally, major positive revisions were made to the sales number of the previous months. I expect this month’s headline to be revised lower a tad next month, but even considering that, this report was the best new home sales report in over a decade. The headline number was solid, the revisions were all positive, and the monthly supply on a three-month average is below 4.3 months.
New home sales get impacted much more than existing home sales by movements in mortgage rates. Mortgage rates from 4.75% to 5% created a supply spike in 2018. At that time, we worked from the weakest new home sales and housing starts recovery ever, and sales were not high, historically speaking. My forecast for the bond market was that it would fall in 2019, and if world growth slowed down, the 10-year yield would get below 2%. This would drive mortgage rates much lower than the 5% levels of 2018.
As you can see below, today’s monthly supply looks much different from what it did at the start of 2020. Demand is better now than any time from 2008-2019. During that period, we never had a monthly supply below 4.3 months with rising sales.
The most critical housing data line to follow in this housing market is the trend in monthly supply for the new home sales market. When the monthly supply is 4.3 months, and below, builder confidence is high. When supply is between 4.4 to 6.4 months, builder confidence is just meh for new construction. As long as new home sales can grow, construction can happen.
When supply is 6.5 months and over, builders will pull back from construction because demand no longer warrants more construction. The baseline supply I use to gauge conditions is a three-month average. We are currently at 3.86 months. For the last three months, supply has been 3.6,4.4, and 3.6 months. When demand for new homes is really good, the monthly supply should be this low; we didn’t have this from 2008-2019, hence why housing starts grew slowly like how my tortoise moves from room to room.
Remember that new home sales and housing starts can vary widely month to month, and those numbers are highly susceptible to revisions, both positive and negative. We are likely to get some negative revisions to the numbers in this report, so it is more helpful to focus on the trend. The trend is your friend.
As long as the monthly supply stays below 4.3 months, like what we had for a good portion of 1996 to 2005, builder confidence will remain high, and they will continue to build. I don’t consider the housing data from before 1996 because too much has changed for those numbers to be relevant to our current economic models. The U.S. economy is more mature and developed than it was from 1960 to the 1990s.
In 2020 to 2024, the biggest tug of war in housing will be between good demographics driving demand and home-price increases suppressing demand when mortgage rates rise. The COVID-19 pandemic has caused the bond market and mortgage rates to be lower than they should be considering current economic conditions. The resulting low mortgage rates have been a blessing for the builders, especially considering the other challenges they face, like skyrocketing lumber prices.
In the current market, low rates are beating lumber prices in that particular paper-rock-scissors game that we are playing. New home sales aren’t working from the low levels we had from 2008 to 2019. New home sales in the years 2020-2024 are an entirely different ball game. Monthly supply levels will be your best guide to where the market is going.
I believe the hostile impact lumber prices will have on-demand in 2021 are overstated, as we can see in the data in the past few months. Lumber prices are a big issue for the entire housing market — not just for the builders but also rehabbers and flippers. Out of all of these, builders are the most capable of handling the high prices.
Homebuilding may be suitable for the public, but it is not a public service. Those who are in the business of rehabilitating homes for sale or rent are in the industry to make money — and won’t take on these projects if the cost of materials eats all the profits.
It will be a great blessing for lumber prices to come down, but we don’t see hints of that happening just yet. When mortgage rates rise, and lumber prices remain high, builders’ confidence will drop, and we can expect a slowdown in new construction. If we do get a big infrastructure plan, labor costs for construction will also increase, eating even more into the builders’ profits. These are things to look out for in the future because we always want to be mindful of the future but not lose focus in the current moment.
The new home sales sector is much different than the existing home sales sector. New homes have all the bells and whistles and are more costly, so the average new home buyer tends to be older and better off financially than the average existing home buyer. This new home sector can’t compete with the existing home sales market in terms of price, so when mortgage rates increase, it’s more of a significant disadvantage to the new home sales market.
However, as we can see, this is not the case today or in the past year. This is one aspect that doesn’t get spoken about too often. We did come from the weakest housing recovery ever, so the production of homes and new home sales weren’t working from an overheated speculative market. The demand for new homes and housing starts from 2018-2021 looks nothing like what we saw from 2002-2005. This is also similar to what we see in the existing home sales market, but we have home price gains as if mortgage demand was as hot as 2002-2005. I did talk about that issue on Bloomberg Financial today and wrote about it yesterday on HousingWire.
We just need to be mindful that we are enjoying some real solid economic data without the consequences of higher mortgage rates and bond yields. At some point in the future, this won’t be the case. Until then, let the monthly supply data guide you as it has guided me for many years.
Mortgage rates topped 7 percent this week, the highest level in 20 years — and the latest sign that the Federal Reserve’s aggressive moves to slow the broader economy are hitting the housing market hard already.
The average rate for a 30-year fixed mortgage, the most popular home-loan product, reached 7.08 percent, according to data released Thursday by Freddie Mac. The last time mortgage rates climbed so high was April 2002, and they are slated to keep climbing as the Fedmoves swiftly to tame a red-hot housing market,a key step in lowering rent costs and ultimately quelling inflation in the broader economy.
The central bank doesn’t directly set mortgage costs, but changes inits policy rate — known as the federal funds rate — ripple through the economy and influence all kinds of lending. Since March, the Fed has raised rates five times, bringing its benchmark rate from near zero to between 3 percent and 3.25 percent. The central bank is expected to raise rates by another 0.75 percentage points next week.
Calculate how much more mortgages will cost as interest rates rise
Those moves have already triggered major consequences for the housing market, and the spike in mortgage rates has prompted somebroader concerns that the Fed is pumping the brakes on the economy with far too much force.
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“People can say, ‘Well, you know, a percent [added] on the mortgage rate is still low.’ But we’ve had several percents on the mortgage rate in a short period of time,” said Diane Swonk, chief economist at KPMG. “The rapid pace at which they’re raising rates are, in and of themselves, destabilizing.”
The average mortgage rate has gone up dizzyingly fast. A year ago, it was 3.09 percent; even as late as March, the average rate for a 30-year fixed mortgage was below 4 percent. The increase from 3.22 percent in January to 7.08percent now, a jump of 3.86 percentage points, is the steepest increase rates have gone through in a year. The previous record was 3.59 percentage points in 1981.
Prices rose again in September, ensuring more interest rate hikes
For much of the pandemic, low rates meant aspiring home buyers flooded into the market, competed for the few homes available and sent prices soaring. But now, wary of shelling out hundreds of dollars more per month on a mortgage, buyers are bowing out, boosting the supply of available homes and helping prices go down overall. This year, when rates were below 4 percent, a family earning the median household income of $71,000 could afford a $448,700 home with a 20 percent down payment. This week, with rates around 7 percent, they could only afford a $339,200 home, according to Realtor.com.
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Home prices are falling at a record pace. The Case-Shiller home price index released earlier this week showed prices were 13 percent higher in August than they were a year ago, down from 15.6 percent higher the previous month. The 2.6 percentage point difference between those two months is the largest decline in the history of the index, which debuted in 1987.
Zillow on Wednesday announced it had laid off 300 workers across several departments, including home loans and closing services, though the company said it is not under a hiring freeze.
Demand for mortgages has also plummeted as quickly as rates have spiked. Total application volume is at its lowest level since 1997, according to the Mortgage Bankers Association. Refinances are down 86 percent from where they were a year ago, and mortgage lenders nationwide, including at major banks, have let employees go as the market slows.And rising rates have boosted interest in adjustable-rate mortgages. The ARM share of applications was at 12.7 percent.
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Home builders are also being pinched. Overall housing starts fell 8.1 percent to a seasonally adjusted annual rate of 1.44 million units in September, according to a report earlier this month from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. So far this year,single-family starts are down 5.6 percent compared to this point last year.
Builder confidence also fell for the 10th month in a row in October, dropping to its lowest level since 2012, excluding the two-month period in spring 2020as the pandemic began. It is half the level it was six months ago.
“This will be the first year since 2011 to see a decline for single-family starts,” Robert Dietz, National Association of Home Builders chief economist, said in a statement. “And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecast to see additional single-family building declines as the housing contraction continues.”
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Still, the Fed’s tools are limited, and officials routinely point to the housing market as one of the clearest signs that their rate hikes are having the intended effect.
“We are starting to see some adjustment to excess demand in interest-sensitive sectors like housing,” Fed Governor Christopher Waller said in a speech this month. “But more needs to be done to bring inflation down meaningfully and persistently.”
Whenor how the Fed’s rate hikes rates will overtake inflation elsewhere in the economy is not yet clear. Rate hikes are designed to snuff out demand, but they do nothing to fix supply-side issues, like shortages of oil and gas, affordable apartments or chips for new cars. Overall, consumer prices remain stubbornly high, rising 8.2 percent in September, compared with the year before.
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Rent costs also are up 7.2 percent in the past year, and rentsrose 0.8 percent from August to September. Goldman Sachs has forecast that overall shelter inflation will peak at 7.5 percent next spring before slowly decelerating to just under 6 percent at the end of 2023. That has major implications for Fed policy, since housing costs makes up a huge portion of the basket of goods used to measure inflation in the economy.
As the Fed fights inflation, worries rise that it’s overcorrecting
But the slowing housing market may also be finally cooling rental prices, too. National rent growth sank to its lowest annual pace (7.8 percent) since June 2021, according to Realtor.com. The U.S. median rental price recorded its second month-over-month decline in eight months in September.
The rise in mortgage rates is slowing down the market even in places where it was red-hot during the pandemic.Through 2020 and 2021, sales prices exploded in the Hudson Valley, as transplants from New York City and elsewhere clamored for the few homes available. But as mortgage rates soar now, the number of homes available has more than doubled in the last three months, jumping from around 150 units to about 380, said Ryan Basten, an associate broker at Berkshire Hathaway HomeServices Nutshell Realty.
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That’s an encouraging sign that the market is returning to some version of normal. But Basten said there’s plenty of uncertainty about the future. He ticked through the recent jumps in mortgage rates: 5 percent “wasn’t too bad,” he said, and 6percent was “workable.” But with the Fed poised to hike rates two more times before the end of the year, Basten said he and others in the industry are left “wondering if there is going to be a real downturn in the market.”
“We can only deal with what we’re dealing with now. I can’t see that mortgage rates are going to go to 10 [percent]. If they did, then that would feel like a recession,” Basten said. “Eight [percent] feels bad. Ten percent would be like, ‘Wow, where we do go from here?’ ”
European bonds set the tone in the overnight session after a normally hawkish ECB member made dovish comments on the near term rate hike/pause outlook. German Bunds rallied a full 10bps peak to trough while US 10s barely managed 5bps over the same time frame. The AM econ data in the US created some 2-way volatility as the Retail Sales headline was at odds with internals, but bonds were already having second thoughts as evidenced by a clear run-in with resistance at 3.75% overnight. Yields were sideways and choppy until Europe closed for the day. After that, there was a modest drift toward–but not into–weaker territory. All in all an uneventful day that is perfectly in line with the broader sideways baseline expected between last week’s rally and next week’s Fed announcement.
Retail Sales
0.2 vs 0.5 f’cast, 0.3 prev
NAHB Builder Confidence
56 vs 56 f’cast, 55 prev
Industrial Production
-0.5 vs 0.0 f’cast, -0.5 prev
08:30 AM
Nice gains overnight with Europe. 10yr down 6.7bps at 3.742 and holding after data. MBS up 6 ticks (.19)
10:38 AM
Quick selling as traders reconsidered data, but recovering now. MBS at highs, up over a quarter point. 10yr down 5bps at 3.758.
12:41 PM
Weakest levels of the day at EU closes. 10yr still down 3.2bps at 3.777. MBDS up only 2 ticks (0.06).
04:31 PM
Leveling off a bit now after hitting weaker levels just after 3pm. 10yr yields down 2.8bps at 3.781. MBS currently unchanged after being down 2-3 ticks (0.06-0.06)
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Builder confidence in the market for newly constructed homes rose another point in July according to the National Association of Home Builders (NAHB). The NAHB/Wells Fargo Housing Market Index (HMI) hit 56 in its seventh straight month of improvement. This is a 25-point gain since its December 2022 low and its highest level since June of last year.
NAHB Chief Economist Robert Dietz said the low inventory of pre-owned homes is shoring up demand for new homes and is pushing builder confidence up, “even as the industry continues to grapple with rising mortgage rates, elevated construction costs and limited lot availability.”
“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers. At the same time, builders are troubled over rising mortgage rates approaching 7 percent and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”
Dietz continued, “Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle.
“Given that shelter inflation accounts for roughly 40 percent of the Consumer Price Index, the best way to ease this largest source of inflationary pressure is to build additional for-rent and for-sale housing. There has been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards. More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.
Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate the traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
The component gauging current sales conditions rose 1 point in July to 62 while the one charting forward-looking expectations fell 2 points to 60. However, Dietz points out that this decline is a reminder that housing affordability continues to be challenged by elevated interest rates. Perceptions regarding the traffic of prospective buyers increased 3 points to 40, also a 13-month high.
The July HMI survey also shows a lessening in the use of builder sales incentives. Only 22 percent of builders report cutting prices in July, down from 27 percent in May and 25 percent in June.
The three-month moving averages for all regional HMI scores moved higher, The Northeast gained 5 points to 52, the Midwest edged up 2 points to 45, the South increased 3 points to 58, and the West posted a 5-point gain to 51.
For the seventh consecutive month, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report rose month-over-month, gaining one-point to a reading of 56, according to a report released Tuesday.
This is the index’s highest reading since June 2022.
The NAHB/HMI report is based on a monthly survey of NAHB members, in which homebuilders are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the homebuilder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.
The NAHB attributes the continued rise in builder confidence to low existing home inventory.
“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” Alicia Huey, the chairman of the NAHB, said in a statement. “At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”
With shelter inflation accounting for 40% of the Consumer Price Index, the NAHB says the best way to combat this is to build additional for-rent and for-sale housing.
“There’s been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards,” Robert Dietz, the NAHB chief economist, said in a statement. “More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.”
Despite the rising interest rates and continued shelter inflation, builders have cut back their use of sales incentives, with just 22% of builders reporting that they cut prices in July, down from 25% in June and 27% in May.
The NAHB reported that homebuilders’ gauge of current sales conditions rose one point to 62. The gauge measuring traffic of prospective buyers increased three points to 40, the highest reading since June of 2022, but the component charting sales expectations over the next six months, fell two points to 60. According to the NAHB, this serves as a reminder that housing affordability continues to be challenged by elevated interest rates.
“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” Dietz said.
Regionally, the three-month moving averages for HMI rose in all four regions, with the West gaining five points to a reading of 51, the South increasing three points to 58, the Midwest rising two points to a reading of 45, and the Northeast rose five points to 52.