Homebuilder sentiment falls to 2-year low on declining demand and rising costs

Concrete slabs are being laid by contractors in Antioch’s Cielo At Sand Creek housing project, Century Communities, California on Thursday, March 31, 2022.
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The market sentiment for single-family homes dropped sharply in May as the mortgage rate shot up and construction material prices rose.

According to the National Association of Home Builders/Wells Fargo Housing Market Index, sentiment fell by 8 points to 69 on May. Although readings over 50 are positive, this is the fifth consecutive month of declining builder sentiment.

This is the lowest level since June 2020 when builders experienced a quick, negative reaction to the onset of the Covid pandemic, but then quickly rebounded. Single-family homes that have outdoor spaces in the suburbs soared after the economic downturn. In November 2020, builders sentiment reached a new record of 90.

This month’s pandemic effect is removed. In September 2019, the U.S. trade war with China had been putting a severe strain on supply chains for building materials.

NAHB Chairman Jerry Konter (a Savannah-based builder/developer) stated that housing leads the business cycle and that housing is slowing.

Out of the three component components of the index, sales conditions are down 8 points at 78 and sales forecasts for the next six month drop 10 points at 63. Buyer traffic declined 9 points, to 52.

According to Mortgage News Daily, buyers in April witnessed the average 30-year fixed rate jump from 4.88% up to 5.41%. Then it hit an all-time high of 5.94% in the first week in May. This year, the rate was just 3.29%. Inflation was also a problem for builders.

Robert Dietz is the chief economist of NAHB. He stated, “The housing market has been facing increasing challenges.” The cost of building materials has risen by 19% over a year; mortgage rates are at a twelve-year high in three months. According to current affordability, less that 50% of home sales can be afforded for the average family.

Rising rates are affecting entry-level buyers the most, however there is a drop in demand across all income levels. A number of surveys also show an increase in the cancellation rate for new construction.

Ivy Zelman, a housing analyst said that they are at an “inflection point”. This was in an interview she did on Monday’s CNBC’s closing bell.

Zelman noted that cancellation rates showed a slight increase in the survey. We did notice a slight increase in incentives. However, some cancellations we heard about from hotter markets were made by private investors.

According to a regional moving average of three months, Northeast builder sentiment was stable at 72. The Midwest saw it fall 7 points to 62, while the South saw it drop 2 points, to 80. The West saw sentiment drop 6 points to 83.

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