Builder Confidence Turns Negative After 8th Straight Monthly Drop

Home builder confidence has turned into downright pessimism. The National Association of Home Builders/Wells Fargo Housing Market Index fell in August for the eighth straight month to its lowest level in more than two years.

NAHB on Monday said elevated interest rates, ongoing supply chain problems and high home prices pushed the HMI six points lower in August to 49, marking the first time since May 2020 that the index fell below the key break-even measure of 50.

All three HMI components posted declines in August; each fell to their lowest level since May 2020. Current sales conditions dropped seven points to 57, sales expectations in the next six months declined two points to 47 and traffic of prospective buyers fell five points to 32.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell nine points to 56, the Midwest dropped three points to 49, the South fell seven points to 63 and the West posted an 11-point decline to 51.

“Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “And in a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit.”

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB Chief Economist Robert Dietz. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”

“While the August HMI drop was considerably larger than consensus estimates, it hardly comes as a surprise,” said Mark Vitner, Senior Economist with Wells Fargo Economics, Charlotte, Va. Builders have been reporting weaker buyer traffic since early this year, and a rising number of builders have reported a spike in cancelations. Many are responding by reducing prices or offering incentives to help offset the impact of higher mortgage rates.”

NAHB said one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5% for those reporting using such incentives. Meanwhile, 69% of builders reported higher interest rates as the reason behind falling housing demand, the top impact cited in the survey.

However, Vitner said there are limits on home builders’ ability to cut prices to support sales. “Many builders have a large number of homes under construction that are set to be completed once a buyer signs a contract,” he said. “With buyer traffic slowing even more abruptly, we expect new home sales and single-family housing starts to slow considerably in the coming months. With all the discounting, new home prices should decline substantially.”

Vitner noted the housing market remains the key transmission mechanism for the Federal Reserve. “Home sales and new home construction were among the first industries to take off as the economy reopened in mid-2020,” he said. “Housing has a powerful multiplier effect throughout the economy, driving demand for building materials, mortgages, insurance, furniture and a whole host of household services.”

The 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.

The NAHB HMI is the first of multiple housing reports coming out this week and next. This morning (Tuesday), HUD/Census releases its monthly New Residential Construction report for July, looking at housing starts and housing permits. On Thursday, the National Association of Realtors releases its Existing Home Sales report for July.

Next Monday, Aug. 22, the Mortgage Bankers Association releases its monthly Builder Applications Survey; on Tuesday, Aug. 24, HUD/Census releases its monthly New Residential Sales report for July; and on Wednesday, Aug. 25, NAR releases its Pending Home Sales Index. MBA NewsLink will provide coverage of each report.