Home builders see ‘housing recession’ as builder sentiment index drops further in August

One year ago, the index stood at 75. In January this year, the index was at 83.

Key details: All three gauges that underpin the overall builder-confidence index fell.

The gauge that measures current sales conditions fell by 7 points; the component that tracks traffic of prospective buyers fell by 5 points; and the gauge that assesses sales expectations for the next six months fell by 2 points.

Homebuilders in August reported a drop in prospective buyer traffic to 32 points, which is the lowest level the gauge has dropped since April 2014 outside of the pandemic.

All regions posted a drop in builder confidence. The declines were led by the West, which saw an 11-point decline, followed by the Northeast, with a 9-point decline, the South, with a 7-point decline, and the Midwest, with a 3-point decline.

Big picture: Home builders are feeling gloomy as buyer demand is cooling. 

Mortgage rates and interest rates are much higher now than a year ago, cooling demand and pushing builders to offer more incentives.

One in five home builders told the NAHB that they were reducing prices in the last month to increase sales or limit cancellations. 

The median price reduction reported was 5%.

What the NAHB said: “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” NAHB’s chief economist, Robert Dietz, said in a statement.

Dietz expects the total volume of single-family starts to fall in 2022, “the first such decrease since 2011.”

What are they saying? “The collapse in the NAHB index points to clear and substantial downside risk for housing construction over the next few months, as builders try to manage their excess inventory,” Ian Shepherdson, chief economist at
Pantheon Macroeconomics, wrote in a note.

“That will be impossible without hefty price declines, now that developers are competing with rapidly rising inventory in the existing homes market,” he added. “In short, the housing downturn has some way yet to run.”

Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.791%
fell in early trading to 2.77%. While the SPDR S&P Homebuilders ETF
XHB,
+0.10%
traded slightly lower during the morning session, the big home builder stocks were mixed:
DHI,
-1.13%
D.R. Horton Inc and
LEN,
-0.22%
Lennar Corp. edged higher while
TOL,
-0.66%
Toll Brothers, Inc. and
PHM,
-1.20%
PulteGroup Inc. edged lower.