Builder sentiment drops 6 points in November
The National Association of Home Builders (NAHB) attributed a decline in home builder sentiment to mortgage rates that approached 8% earlier this month.
Although rates continue to hammer builder confidence, the NAHB said hope is on the horizon as recent economic data suggest housing conditions may improve in the coming months.
Builder confidence in the market for newly built single-family homes in November fell six points to 34 in November, according to the latest NAHB/Wells Fargo Housing Market Index (HMI) released this morning.
The new report is the fourth consecutive monthly drop in builder confidence, as sentiment levels have declined 22 points since July and are at their lowest level since December 2022.
The NAHB also noted that nearly all of the HMI data for November was collected before the latest Consumer Price Index was released and showed that inflation is moderating.
“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 of the market,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama. “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. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market.”
NAHB is forecasting approximately a 5% increase for single-family starts in 2024 as financial conditions ease with improving inflation data in the months ahead.
“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” said NAHB Chief Economist Robert Dietz. “In particular, 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%. 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.”
But with mortgage rates running above 7% since mid-August, per Freddie Mac data, many builders continue to reduce home prices to boost sales.
In November, 36% of builders reported cutting home prices, up from 32% in the previous two months, the NAHB reported. This is the highest share of builders cutting prices during this cycle, tying the previous high point set in November 2022. The average price reduction in November remained at 6%, unchanged from the previous month.
Additionally, 60% of builders provided sales incentives of all forms in November, down slightly from 62% in October.
All three major HMI indices posted declines in November. The HMI index gauging current sales conditions fell six points to 40, the component charting sales expectations in the next six months dropped five points to 39 and the gauge measuring traffic of prospective buyers dipped five points to 21.
Looking at the three-month moving averages for regional HMI scores, the Northeast fell one point to 49, the Midwest dropped three points to 36, the South fell seven points to 42 and the West posted a six-point decline to 35.
More builders see traffic declines
According to the monthly BTIG/HomeSphere survey, also released this morning, private builder sales and traffic continue to point to a weak operating environment, even as public builders suggest it’s more seasonal normalcy.
Among the private HomeSphere builders surveyed, only 15% of respondents reported year-over-year increases in October, while 45% saw a decline compared to 28% and 44% in September.
Traffic also worsened, with 16% reporting an increase and 48% a decline. In September, 27% of builders reported increases and 39% declines.
Pricing and incentive use remain mixed, although more builders reported raising prices in October, likely to cover rising input costs.
BTIG's Carl Reichardt said, "new home demand trends remain quite sluggish for private builders.”
However, public builders told a somewhat different story about October.
“We believe availability and cost of capital, plus the ability to buy down mortgage rates for customers all work in public builders’ favor in this environment,” Reichardt added.
The latest Monthly New Residential Construction report, featuring housing starts and permit data for October 2023, is scheduled to be released on Nov. 17.
