NAHB chief economist says Fed policy & high construction costs will cause first decline in housing starts since 2011.

KEY TAKEAWAYS

• For the first time since May 2020, the monthly NAHB/Wells Fargo Housing Index fell below the break-even measure of 50.
• Roughly one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations,.
• Meanwhile, 69% of builders reported higher mortgage interest rates as the reason behind falling housing demand.

Builder confidence is sinking like a stone, in part the result of what an economist for the National Association of Home Builders (NAHB) now calls a “housing recession.”

NAHB today released the results of its monthly survey of home builders, which found that builder confidence in the market for newly built single-family homes fell for the eighth straight month in August, amid continuing supply-chain problems, high materials prices, and falling home affordability.

In fact, for the first time since May 2020, the monthly NAHB/Well Fargo Housing Index fell below the break-even measure of 50, declining six points to 49, the NAHB said.

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB Chief Economist Robert Dietz. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.”

Dietz noted, however, that “as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”

The latest report on inflation, released last week, showed that the Consumer Price Index in July was unchanged from June, and had dipped to 8.5% year over year from 9.1% in June.

NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga., said the survey shows ongoing increases in construction costs and mortgage rates continue to weaken market sentiment for single-family home builders. “And in a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020, when the pandemic first hit.”

Roughly one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations, the NAHB said. The median price reduction was 5% for those reporting using such incentives. Meanwhile, 69% of builders reported higher mortgage interest rates as the reason behind falling housing demand, the top impact cited in the survey.

All three HMI components posted declines in August, with each falling to their lowest level since May 2020. Current sales conditions dropped seven points to 57; sales expectations in the next six months declined two points to 47; and traffic of prospective buyers fell five points to 32.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell nine points to 56, the Midwest dropped three points to 49, the South fell seven points to 63, and the West posted an 11-point decline to 51.

Derived from a monthly survey that NAHB has conducted for more than 35 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index, for which any number over 50 indicates that more builders view conditions as good than poor.

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