Affordability Issues Sends Home Builders’ Index Tumbling

The National Association of Home Builders/Wells Fargo Housing Market Index suffered its biggest one-month drop since 2014, falling by eight points in November as home builders cited growing affordability concerns.

Builder confidence in the market for newly built single-family fell by eight points to 60, NAHB said. The index measuring current sales conditions fell seven points to 67; the component gauging expectations in the next six months dropped 10 points to 65; and the metric charting buyer traffic registered an eight-point drop to 45.

Looking at regional three-month moving averages, the Northeast rose two points to 58. The Midwest edged one point lower to 57; the South declined two points to 68 and the West dropped three points to 71.

“For the past several years, shortages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction,” said NAHB Chief Economist Robert Dietz. “While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall. As a consequence, builders have adopted a more cautious approach to market conditions.”

Dietz noted despite the sharp November drop home builder sentiment remains in positive territory. “Builders report that they continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices,” he said.

“There is little doubt that home buyers are pulling back from the market in a significant and sudden way,” said Mark Vitner, senior economist with Wells Fargo Securities, Charlotte, N.C. “The sudden weakening in the homebuilders’ index is probably more important than the still apparently strong level. Not only do builders report that current sales have slowed abruptly but expectations for future sales have also fallen.”

Vitner said the pullback in builder confidence looks “eerily similar” to the 10-point plunge in early 2014, spurred by a sharp run-up in mortgage rates that abruptly ended a budding recovery in new home sales.

“The Federal Reserve will likely take note of this morning’s number, as the housing market is one of the primary transmission mechanisms for monetary policy,” Vitner said. “Members of the Federal Open Market Committee need to ponder the question as to whether or not they would really like to see mortgage rates a quarter or a half percentage point higher than they are today going into the spring 2019 selling season.”