Home builder sentiment falls to 2-year low on declining demand, rising costs

Contractors work on concrete slabs in Century Community’s Cielo at Sand Creek residential development in Antioch, California, on Thursday, March 31, 2022.

David Paul Morris | Bloomberg | beautiful pictures

Builders’ sentiment in the market for single-family homes plummeted in May, driven by soaring mortgage rates and unrelenting construction material costs.

According to the National Association of Builders / Wells Fargo Housing Market Index, sentiment fell 8 points to 69 in May. Indexes above 50 are considered positive, but this is the fifth consecutive month. Next, the builder’s psychology declined.

This is the lowest reading since June 2020, when builders had a brief, rapid negative response to the onset of the Covid pandemic before rapidly bouncing back. As the economy slowed, demand for single-family homes with outdoor space in the suburbs skyrocketed. Builders sentiment hit a record high of 90 in November 2020.

Calculating the impact of that pandemic, this month’s index is the lowest since September 2019, when the US trade dispute with China was taking a heavy toll on the building materials supply chain.

“Housing leads the business cycle, and housing is slowing,” said NAHB President Jerry Konter, a builder and developer in Savannah, Georgia.

Of the three components of the index, current sales conditions fell 8 points to 78, and sales expectations over the next six months fell 10 points to 63. Buyer traffic fell 9 points to 52.

Buyers in April saw the average 30-year fixed mortgage rate jump from 4.88% to 5.41% and then hit a high of 5.64% in the first week of May. , according to Mortgage News Daily. The rate started this year at just 3.29%. At the same time, builders have seen inflation hit their costs heavily.

“The housing market is facing increasing challenges,” said NAHB chief economist Robert Dietz. “Building materials costs are up 19% from a year ago; in less than three months, mortgage rates jumped to a 12-year high and based on current affordability conditions, below 50% of new and existing home sales are affordable for a typical family.”

Input-level buyers are being hit the hardest by rising rates, but the drop in demand is showing at all levels. Some surveys are also showing an increase in cancellation rates for new construction.

“We’re seeing an inflection point,” housing analyst Ivy Zelman said in an interview on CNBC’s “Closing Bells” on Monday.

“Our survey showed an increase in cancellation rates,” says Zelman. “We’ve seen incentives go up and some cancellations, we’ve heard from some of the hotter markets, actually private investors.”

By region, above the three-month moving average, builder sentiment in the Northeast was flat at 72. In the Midwest it was down 7 points to 62 and in the South down 2 points to 80. In the West , psychology dropped 6 points. to 83.

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