US home builder sentiment deteriorated to the worst levels of 2024 in June, according to data released on Wednesday.
At 43, the NAHB’s gauge spent a second month below the threshold marking net optimism from pessimism and it’s no secret why: Rates are too high.
“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” Carl Harris, a Wichita builder currently serving as NAHB Chair, said, adding that builders are likewise grappling with elevated rates for construction and development loans, not to mention “chronic labor shortages and a dearth of buildable lots.”
Recall the recent history of the NAHB survey: Builder moods worsened in August of 2023 as an acute selloff at the long-end of the US Treasury curve drove up financing costs. The situation inflected beginning in December as bonds rallied alongside stocks. Sentiment was supported early this year by expectations for Fed cuts, but more recently the “higher for longer” mantra and mortgage rates above 7% spoiled the mood again.
The good news is, mortgage rates fell below 7% for the first time in months on the MBA’s gauge. The eight basis point decline reflected a sharp rally in Treasurys that took 10s down to ~4.20% late last week.
Mortgage applications to buy rose again, with the index hitting its best levels since March. The MBA’s overall measure, which includes refi activity, was the highest since January.
Needless to say, buyers are now hyper-sensitive to rates. Prices continue to rise inexorably and given supply-demand realities — the US has a structural mismatch — relief can only come on the rates side of the equation.
NAHB Chief Economist Robert Dietz called the current situation “unusual.” Elevated shelter inflation is “making it difficult for the Fed to achieve its [inflation] target,” he said Wednesday. That, in turn, is preventing the Committee from cutting rates.
And yet, as Dietz went on to note, “the best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply,” an outcome best facilitated by “a more favorable interest rate environment for construction and development loans.”
Once again, the Fed’s confronted with the extremely uncomfortable prospect that high rates are now actually contributing to inflation. The corollary is still too much for the orthodox crowd to happily countenance: The best way to bring down inflation in the US may be to cut rates.
Cut rates and the price of the house will run away from you.
Cut rates too early and the price of a house will run away from you. Cut rates when unemployment is rising and buyers are feeling insecure and prices will cooperate.
Further, one could perhaps increase housing stock by making it less advantages for corporations to “invest” in single family structures.
The Trump tax “cut” capped SALT and mortgage interest at 10,000. It makes sense for corporations to “invest” in real estate because they can expense the interest and taxes. I can’t. I can sell a house without tax gains every 2 years, but I’m sitting tight because of high interest rates I can’t get full value
I was about to post something really cynical about capitalism here, but, I can’t even.
“The corollary is still too much for the orthodox crowd to happily countenance.”
Housing market is a quagmire. Pull on one string and two become a knot. In attempt to make everyone a winner, everyone becomes a loser.
What? Why go with something counterintuitive when sticking by what we know has been working so well?
I would conjecture that prices might not move that much at first overall, but turnover would dramatically increase. Betting we will see prices on average lag cpi over the next 3-5 years to bring things better into line. Of course that depends on which area you might be speaking about. Some of the moonshot areas will lag, and some of the former losers may shine.