The Numbers: In November, builder confidence decreased for the fourth month in a row, primarily due to weakening buyer demand caused by a rise in mortgage rates to 8%. This decline led the National Association of Home Builders (NAHB) to report a 6-point drop in their monthly confidence index, bringing it down to 34, the lowest level since December 2022.
Sales Incentives and Price Cuts: To combat the waning interest from buyers, builders implemented various sales incentives. As a result, the percentage of builders reducing home prices surged to 36%, the highest level since November 2022. Additionally, builders who offered price cuts averaged a reduction of 6%. Moreover, approximately 60% of builders utilized incentives other than price cuts to stimulate sales during November.
Outlook: Despite the current decline in builder sentiment, there is optimism for improvement in December. The projected decrease in mortgage rates and signs of a weakened U.S. economy, coupled with moderating inflation, could potentially boost builder confidence.
Economists' Forecasts: The November drop in builder confidence was unexpected by Wall Street economists, who had predicted that sentiment would remain unchanged. In comparison, the index stood at 33 a year ago.
Future Outlook: The NAHB anticipates a 5% increase in single-family home starts in 2024 due to improvements in financial conditions resulting from favorable inflation data in the coming months.
Gauges of Builder Confidence: All three indicators comprising the overall builder-confidence index experienced a decline.
Builder Sentiment Falls in Key Areas
- Builders expressed pessimism about current sales conditions, with the gauge falling by 6 points.
- Future sales were seen as downbeat, with the gauge falling by 5 points.
- Builders also experienced a drop in the traffic of prospective buyers, resulting in a 5 point decrease in the gauge.
The Impact of Interest Rates and Buyer Demand
Rates inched towards 8%, causing concern among buyers. To compensate, builders tried various strategies such as cutting prices and offering more generous mortgage rate buy-downs. However, as rates fell back to the 7% range, builder sentiment is expected to improve in the months ahead as buyer demand recovers.
Furthermore, the lack of inventory across the nation will continue to maintain interest in newly built homes. Existing homeowners are less likely to sell due to the "lock-in effect" which provides little incentive for them to move.
Insight From NAHB
According to Alicia Huey, the Chairman of the National Association of Home Builders (NAHB), the rise in interest rates since August has affected builder views of market conditions. Prospective buyers have been priced out of the market, leading to a decrease in builder sentiment. However, recent macroeconomic data indicates that there will be an improvement in home construction conditions in the coming months, as stated by Robert Dietz, Chief Economist at the NAHB.
Market Response
On Thursday morning, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) was below 4.5%. The SPDR S&P Homebuilders ETF (XHB) and major home builder stocks including D.R. Horton Inc (DHI), Toll Brothers (TOL), and Lennar (LEN) experienced positive trading activity during the morning session. Additionally, both DJIA and SPX stocks were up.
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