Home Builder Confidence Plummets

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) took the type of dip yesterday that leaves stomachs trailing behind. 

“Builder confidence plunged in July as high inflation and increased interest rates stalled the housing market by dramatically slowing sales and buyer traffic,” NAHB wrote. “In a further sign of a weakening housing market, builder confidence in the market for newly built single-family homes posted its seventh straight monthly decline in July, falling 12 points to 55.”

The only time the index has dropped more sharply in its history was April 2020 at the beginning of the pandemic when it fell by 42 points.

The organization cited production bottlenecks, rising home building costs, high inflation, land and construction costs, and rapidly escalating financing expenses.

“In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations,” the press release quoted NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Georgia.

“Regional variations within the NAHB housing metric explain a lot,” said Jeffrey Roach, chief economist for LPL Financial, in a statement. “The west region continues to feel the impact of waning housing demand as workers benefit from flexible working arrangements. As of July, the southern region is 12 points ahead of the West, the highest gap since the beginning of the regional index.”

“The HMI remains just above the level that indicates builders still view conditions favorably,” wrote Oxford Economics. “We look for housing starts to lose some momentum in the second half of 2022 with starts averaging around 1.5mn in Q4, but the deterioration in builder sentiment lends a downside risk to the forecast.”

This comes at a bad time. There have been documented shortages in the number of available houses for buyers, both needing affordable stock and more middle-income consumers and affordability has continued to decline.

The National Association of Realtors noted in March that families with at least a median income should, in theory, be able to afford a median-priced home, assuming a 20% down payment, 30-year mortgage, and no more than 25% of family income going to mortgage payments. However, “[f]irst-time buyers typically spent 25.6% of their family income on mortgage payments, making a home purchase unaffordable,” the group wrote at the time.

“Most concerning, traffic of prospective buyers fell the lowest since May 2020, suggesting that the housing market has more downside to go as interest rates trek higher and inflation chisels away consumer purchasing power,” Roach continued. “Overall, the residential real estate market is in a contraction phase, not necessarily in a recession but this hinges on the duration of historic inflationary pressures for home builders from high raw material prices and a tight labor market. Some raw material prices are already off recent highs so this should bode well for builders in the coming months.”