Economic Report: ‘The housing market faces an inflection point’: Home-builder confidence declines as interest rates rise

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The numbers: The National Association of Home Builders’ monthly confidence index once again fell two points from the previous month to a reading of 77 in April, the trade group said Monday. The index remains at the lowest level since September.

Nevertheless, index readings above 50 indicate that more builders believe that conditions are good rather than poor. The last time the index dropped below 50 was back in April and May 2020 at the start of the COVID-19 pandemic.

What happened: The overall index’s decline was mainly caused by a drop in the underlying index that measures builders’ views on the traffic of prospective buyers. This reading decreased six points over the past month to 60, signaling the lowest level since July 2020. The measure of sentiment regarding current sales also declined, albeit by a smaller amount.

The underlying index that gauges home builders’ expectations of single-family home sales in the next six months rebounded after falling 10 points the previous month, rising to a reading of 73.

The big picture: A separate survey from BTIG and HomeSphere found that 42% of home builders believe that interest rates are negatively affecting their business, up from less than 22% in January. Nevertheless, the survey still found that sales were up in March for small- and mid-sized home builders, and most had still raised prices.

The full impact of the sudden surge in mortgage rates, following the Federal Reserve’s actions to address high inflation, remains to be seen.

In a research note, analysts at Goldman Sachs noted that the housing sector is “the most interest rate-sensitive segment of the economy.” Still, the severe shortage of homes for sale relative to demand should buffer some of the hit the housing market will take from rising rates, they said. Notably, they argued that new-home construction shouldn’t change much as a result, since builders won’t need to fear that the properties they manufacture will go unsold.

Looking ahead: “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” Robert Dietz, chief economist for the National Association of Home Builders, said in the report.

“The two key housing market releases this week — housing starts and existing home sales — are likely to show activity pulled back in March as 30-year mortgage rates have soared to 12-year highs,” Sal Guatieri, senior economist at BMO Capital Markets, said in a research report. “Not surprisingly, the impact of higher rates on the economy is showing up first in the most interest-sensitive area. It doesn’t help that soaring house prices also eroded affordability.”

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