Homebuilder sentiment tumbled for a 10th consecutive month in October.
In other words, sentiment has deteriorated every month in 2022, not surprising considering the extraordinary rise in mortgage rates and persistent distortions across the housing market, all of which point to a perfect storm, commensurate in severity with the scope of the euphoria that characterized the pandemic bonanza.
At just 38, the NAHB gauge was the lowest since August of 2012 if you don’t count the plunge associated with the onset of the pandemic (figure below).
It’s hard to find the right adjective. There’s no politely academic way to describe this situation. Sentiment, as measured by the blue line on the chart, is going straight down.
No economist out of almost three-dozen surveyed predicted a print below 39. The range was 39 to 45.
The read-through for starts is bad. “This will be the first year since 2011 to see a decline for single-family starts,” Robert Dietz, NAHB chief economist, said Tuesday.
The outlook for next year is dicey. “Given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues,” Dietz went on to say.
A measure of current single-family sales dropped to 45. The forward-looking gauge fell to an abysmal 35, worse than the pandemic low (figure above).
This all bodes very poorly. Consider that the headline NAHB gauge has now halved over just six months.
Jerry Konter, NAHB chairman and a builder himself, didn’t mince words. “This situation is unhealthy and unsustainable,” he said. “Policymakers must address this worsening housing affordability crisis.”
The beatings will continue until morale improves
“Policymakers must address this worsening housing affordability crisis.” Spoken like a guy who is peeved because the flow from the money spigot is slowing. I have no sympathy to his position in the broader equation. Sure, he’s a builder and takes on risk. Don’t sellers adjust (or go bust) to consumer appetites? Isn’t that how it’s supposed to work?
The world will experience a recession next year. I reckon it’ll be especially bad in Europe. But it will be a slow and painful experience for everyone the world. The US will have it bad as well, but Europe’s experience of the recession is likely to be a lot worse. And it won’t be a picnic in the US either — just not as profound.
So buckle up. Now is the time to check your risk tolerance and reassess the risk you carry. We are in for a bumpy and unpleasant ride for the next year or so. And it’s not pretty, especially if you have never taken this ride before.
He builds houses. He’s not a hedge fund manager. This tendency we have (and I include myself in this, by the way) to instinctually lambast anybody and everybody who complains about higher interest rates as a self-serving “book-talker” is kinda silly past a certain point. I mean, I do think builders have a legitimate gripe when mortgage rates look like they might triple over a 12-month window. That is absolutely unsustainable.
Thanks for making the point. On reflection, it may be true that I have preconceived notions of dirty white t-shirts on sweaty, money-grubbing home builders (one of whom was the father of a buddy of mine during my childhood). But that builder I knew while growing up built more than one thousand homes, which was not at all a bad thing, and he did it well.
As much as you do on a daily basis to distill relevant information and share your expertise, helping us all to keep abreast of the market pulse and current events that impact it, I really appreciate your sense of fairness and obvious effort to be even-handed in comment and criticism. As much as what you say in your work here, the quality of your stewardship of this site says a lot about you and supports the persistence of The Heisenberg Report. Thank you! I really do like it. And your good management supports my reading enjoyment and play in the sandbox!
Most of the time I’m basically just apologizing for something I feel bad for saying myself. Ha. I’ve been very harsh about people talking their books over the course of this year, so lately I’ve tried to dial that back by, for example, suggesting Cathie Wood might have a point and by saying, as I did here, that builders may have a point too. But you’re absolutely right. At the end of the day, everybody just wants the free money machine to start back up, and one way of jump-starting it is to tell the people who control it that the world’s about to end, which is basically what homebuilders and Wood are doing.
Unfortunately, I have taken this ride before and my PTSD symptoms are beginning to surface.
Unquestionably looks bleak for the industry, and the general economy. But with resultant contraction in supply and given still limited inventory, maybe not so much for values (which would be not-so-good for affordability). The last two times sentiment was so bleak were good times to be RE investors…as I suspect will be the case again (in ’23 or ’24)…
I hate to say this as a homeowner, but it is clear to me that home prices must come down, I do believe that current home prices are unsustainable. When I read stories that home buyers were bidding 20k-100k over asking I knew it was the top of the market was near, which on hindsight it was. But I don’t think the pain will be as bad as it was in 2008. I still remember being underwater on my mortgage for 6 or more years. It was difficult but I survived.
Thanks for sharing, @justmyopinion. I’m sympathetic. Sounds like those 6 years were challenging. It also sounds like you managed through it substantially, though you may have had some uncomfortable months over those years. Glad you got through it.
There’s real power in the US economy to make money. But that power can work against noble Americans just trying to have a home as an investment. Well after Jimmy Carter and 20% mortgages, and a couple years after the crash of 1987 when the Dow dropped more than 22% in one-day, my wife and I bought our first home. Greenspan was about 15 months into his leadership at the Fed. We had a 12% mortgage, which made my wife happy, but I didn’t like it at all. Needless to say, I took pleasure in refinancing that house more than once and getting the rate down as the financial system loosened up.
Over time, the economy and my employment (and income) improved. Greenspan did his job at the Fed and lowered market rates. We sold our first home after several years. The rate we received on our next home was 6.0% – much more reasonable. And by refinancing as the financial landscape evolved under Greenspan, I was able to get our rate down to 3.65%. We had that home for 20 years.
Barring WWIII, I expect this down cycle will be resolved by the end of 2023. But the possibility of WWIII, or at least ongoing troubles from Russia, creates the possibility of economic discomfort lingering further in time. I hope Putin and his henchmen will get their comeuppance from Ukraine. But unfortunately, it’s more complicated, and that outcome may not play out readily.
I have hope that green energy research will be accelerated in response to the burden placed on all economies by the war in Ukraine. There are safe and practical alternative energy options being developed as we speak. Hydrogen can be pushed harder toward maturity. There are innovations in solar that may present opportunities. Nomi Prins is promoting something called “Liquid Energy” (don’t ask me what that is).
We already have small modular nuclear reactors that operate safely. Thorium reactors are completely safe. Research has progressed to a point from which we can begin to see some of these possibilities being realized. Biden’s climate bill can be a help as well by providing some very timely funding.
Fingers crossed we may reach a turning point sooner than we think, out of necessity, in response to Putin’s war.
One way around this for would-be buyers is to find a builder who wants to develop a neighborhood, pick a lot, roll up the lot with the construction costs into one purchase contract, then put down the earnest money and hope that by the time the house is finished and it’s time to close, rates will be lower. I doubt that’s an option for most Americans, but if you wanted to build a $1 million home, and you had a quarter mil in cash, you could put $50,000 down in good faith with the builder, take the purchase contract to the bank and float until closing and keep the other $200,000 in a money market fund at 3.5% while the home’s being built. Again, I realize most Americans would say something like “Wow, yeah, that must be nice!” but I’m just saying that there are ways to play this situation if you have money.