Builder confidence in the housing market took a hit in August, marking a significant shift after seven consecutive months of growth. This downturn raises concerns for the new-home construction sector, which has been struggling with the impact of rising mortgage rates, low supply, and increasing prices.
The National Association of Home Builders' index, which measures builder confidence, dropped six points in August to a rating of 50. This decline came as a surprise to economists who had expected the index to remain steady at 56.
One of the contributing factors to this decline is the rise in mortgage rates. Over the past few weeks, the average 30-year fixed-rate mortgage has been steadily climbing. Freddie Mac's weekly report shows rates just below 7% last week, and it is anticipated that they may surpass that mark this week. The increase in mortgage rates can be attributed to the rise in the 10-year Treasury yield, which often influences mortgage rates.
Alicia Huey, chairman of the home builder group, explained that rising mortgage rates and high construction costs have had a negative impact on builder sentiment. These costs are primarily due to a shortage of construction workers, a lack of available land for construction, and ongoing shortages of distribution transformers.
The drop in builder confidence has raised concerns about the upcoming July new-home construction data, which is set to be released soon. Economists predict that construction on new homes began at a seasonally-adjusted annual rate of 1.44 million in July, a slight increase from June's preliminary figure of 1.43 million. The home builders index serves as an indicator for the next six months of single-family housing starts, which account for the majority of total housing starts.
The decline in builder confidence serves as a warning sign for the new-home construction industry. The challenges posed by rising mortgage rates, limited supply, and higher costs are likely to impact the sector's growth in the coming months.
The Bright Spot: Sales of Newly Constructed Homes
Sales of newly constructed homes have been a bright spot in recent months, defying the otherwise tepid housing market. According to census data, contracts for new single-family homes in June reached a seasonally-adjusted annual rate of nearly 700,000, marking an impressive increase of over 20% compared to the previous year. However, this positive trend contrasts with a decline in contract signings for existing homes, which were 15.6% lower than last year's levels, as reported by the National Association of Realtors.
Ongoing Housing Affordability Challenge
The confidence reading serves as a stark reminder that housing affordability remains an ongoing challenge. A trade group study revealed that approximately two out of every five homes sold in the second quarter were considered affordable for families with median income—the second-lowest reading since the consistent tracking of this data began in 2012.
The Break-Even Point
With a reading of 50, the index indicates that builders are equally split on market conditions. While builders hold an overall positive outlook on present and future sales, they express concern about the traffic of prospective buyers.
Impact on Home Builder ETFs
Following this news, the SPDR S&P Homebuilders (ticker: XHB) and iShares U.S. Home Construction (ITB) exchange-traded funds, which track home builders and related industries, experienced a decline. Despite this setback, both funds have generated significant gains of approximately 40% and 45% respectively throughout the year. Public home builders have benefited from a lack of existing homes for sale.
Demand Persists Despite Challenges
Despite challenges such as housing costs and construction constraints, the demand for new construction continues to be supported by the scarcity of resale inventory. Many homeowners choose to stay put as they are locked in at low mortgage rates. Huey of the home builders group emphasized the role of these factors in sustaining demand for new construction.
High Costs Remain a Foreseeable Future
A recent note from Moody's Investors Service predicts that homebuying costs will remain high until 2024. The analysts anticipate that prices and builder margins will decline for new homes due to incentives and other factors. However, the lean inventory of existing homes for sale, with homeowners hesitating to sell due to low mortgage rates, will only partially alleviate the strains on builders' revenue and margins.
In conclusion, while sales of newly constructed homes have provided a glimmer of hope in an otherwise sluggish housing market, the challenges of affordability and limited inventory persist. It is crucial for builders to navigate these obstacles while adapting to the ever-changing dynamics of the market.