Homebuilder sentiment in the US dropped a fourth month to the lowest since December, an update released on Thursday showed.
It’s been a roller coaster for builders. Sentiment fell every month in 2022 as the Fed dialed up the most aggressive rate-hiking campaign in a generation and buyers struggled with an increasingly onerous affordability calculus.
Things turned around in 2023 when a dearth of resale inventory left new construction as the only option for anyone not priced out of the housing market. Sentiment rose for seven straight months.
Then, in August, a renewed selloff at the long-end of the Treasury curve drove mortgage rates through 2022’s highs, further burdening already stretched buyers. Sentiment has fallen every month since. Prior to November’s bond rally, mortgage rates were at new 23-year highs close to 8%.
NAHB Chairman Alicia Huey offered a familiar lament. “The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out,” she said Thursday.
“Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory,” Huey added.
The darkening mood among builders bodes poorly for housing starts, or at least it has historically.
This cycle is different in too many ways to count, but if past is precedent, builder sentiment should lead starts lower. An update on starts and permits is due Friday.
It’s not all bad news, though. This month’s bond rally pushed mortgage rates lower, which should bolster buyers at the margins, particularly given still scarce existing home supply.
“The 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%,” NAHB Chief Economist Robert Dietz remarked. “Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December.”
Fingers crossed. In an update published Thursday, Redfin’s Dana Anderson flagged the favorable CPI report. “Mortgage rates are declining partly because inflation is easing,” she said. “That means it’s almost certain the Fed won’t hike interest rates again this year — and they may start cutting rates earlier than expected.”
I was thinking the dearth of resale supply would be a boon to homebuilders, especially as housing prices have remained stubbornly high. Short of government-funded building, I don’t see how this gets resolved any time remotely soon.
I did see an op-ed in the Times suggesting that the Fed start buying mortgage-backed securities to bring mortgage rates back down and encourage some movement in existing housing, but it’s hard to know whether that would really do much to ease the shortage when the sellers still need to go somewhere. I suppose it might help builders a bit, but it’d still take time for builders to get projects off the ground.
Longer-term (i.e. in a decade or two), flat population growth and an aging baby boomer generation might start to free up some housing stock, but we may also see people flee places like Phoenix where a lot of new building has been happening leading to continued high demand in places that won’t be so dang hot. Very hard to imagine how housing gets better in the short or long term short of drastic government intervention akin to the investment in renewable energy and chip manufacturing.
Whose hopes, is the wrinkle. Sellers are perfectly happy with constrained supply, and the large builders don’t mind it too much either. Buyers and brokers – and inflation watchers – feel the opposite. Institutional investor buyers (the big SFR fleets) have reportedly backed way off. Which is interesting, because they should have the lowest cost of capital.
Homebuilder stocks, and building material stocks, currently seem unconcerned about weak builder sentiment. Investors probably think the relationship is rates –> sentiment –> starts –> sales.