August 15, 2022
Builder confidence took a hit in August, breaking its streak of continuous growth over the past seven months. This downturn raises concerns for the new-home construction sector, which has been a bright spot in a housing market plagued by rising mortgage rates, limited supply, and escalating prices.
The National Association of Home Builders’ index, a widely followed measure of builder confidence, dropped six points to 50 in August, surprising economists who had anticipated a steady reading of 56.
One factor contributing to this decline is the uptick in mortgage rates. In recent weeks, the average 30-year fixed-rate mortgage has been on the rise, with Freddie Mac’s weekly gauge hovering just below 7% last week. There is a possibility that this closely watched survey could exceed 7% this week, as the 10-year Treasury yield, which often influences mortgage rates, experienced an increase on Monday and early Tuesday.
In addition to higher mortgage rates, the home builder industry is also grappling with elevated construction costs due to a shortage of skilled workers, a lack of available land for building, and persistent shortages of distribution transformers. These factors have collectively dampened builder sentiment in August, according to Alicia Huey, Chairperson of the National Association of Home Builders.
This decline in builder confidence now casts a shadow over the upcoming release of July’s new-home construction data on Wednesday. Economists anticipate that construction on new homes was initiated at a seasonally-adjusted annual rate of 1.44 million in July, slightly higher than the preliminary figure of 1.43 million in June. The builder confidence index is designed to provide insights into the next six months of single-family housing starts, which account for the majority of total housing starts.
Overall, the weakening of builder confidence suggests that challenges in the housing market persist, posing potential obstacles to the ongoing growth of new-home construction.
Sales of Newly Constructed Homes Surge
Sales of newly constructed homes have seen a significant increase in recent months, providing a bright spot in an otherwise lackluster housing market. According to census data, contracts for new single-family homes in June were signed at a seasonally-adjusted annual rate of nearly 700,000, marking a growth of over 20% compared to the previous year. In contrast, the National Association of Realtors reported that contract signings for existing homes were down by 15.6% from the previous year.
Ongoing Housing Affordability Challenges
Despite the positive sales numbers, the confidence reading suggests that housing affordability remains a persistent concern. The home builders group emphasizes that approximately two in every five homes sold in the second quarter were considered affordable for families with median incomes. This figure represents the second-lowest reading since 2012 when consistent tracking of this data began.
Split Views on Market Conditions
With a decline to a reading of 50, the index reaches its break-even point where builders hold equally divided opinions on market conditions. Analyzing the index’s components reveals that builders, on the whole, express positivity towards present and future sales conditions but hold negative views regarding prospective buyer traffic.
Impact on Home Building ETFs
The news of the declining confidence reading has affected exchange-traded funds (ETFs) that track home builders and related industries. Both the SPDR S&P Homebuilders (XHB) and iShares U.S. Home Construction (ITB) ETFs have experienced a decline in value. However, it is worth noting that these funds have still achieved significant gains of around 40% and 45% respectively throughout this year, as public home builders have benefited from limited availability of existing homes for sale.
Potential Constraints and Demand Factors
Despite the challenges posed by rising housing costs and construction limitations, demand for new construction remains strong due to a lack of resale inventory. Many homeowners are choosing to stay in their current homes because of the favorable mortgage rates they secured. According to the home builders group, this trend has been a contributing factor to the sustained demand for new construction.
Moody’s Investors Service Outlook
Moody’s Investors Service has projected that homebuying costs will remain high until 2024. Analysts anticipate that prices and builder margins for new homes will decrease during this period due to various factors and incentives. However, the limited inventory of existing homes for sale, as homeowners with low mortgage rates are reluctant to move, will only partially alleviate the pressure on builders’ revenue and margins.