With interest rates rising, building materials still hard to come by, and home prices still growing — though more slowly — both builder confidence in the housing market and applications to buy new homes continue to fall.
According to the latest National Association of Home Builders’ (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence fell eight points in October to 38 — the 10th consecutive monthly decline and half the level it was six months ago.
With the exception of two months at the start of the pandemic in the spring of 2020, it’s the lowest confidence reading since August 2012.
Buyers also lack confidence in the market, with the traffic of prospective homebuyers falling to its lowest level since 2012 (again, excluding the two-month period in the spring of 2020 at the beginning of the pandemic).
“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.”
Based on a monthly survey that NAHB has conducted for more than 35 years, the NAHB/Wells Fargo 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 of the NAHB/Wells Fargo HMI are used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor, the NAHB said.
All three HMI components posted declines in October. Current sales conditions fell nine points to 45; sales expectations in the next six months declined 11 points to 35; and traffic of prospective buyers fell six points to 25.
Looking at the three-month moving averages for regional HMI scores, the Northeast fell three points to 48; the Midwest dropped three points to 41; the South fell seven points to 49; and the West posted a seven-point decline to 34.
The builder sentiment index report comes the same day as the Mortgage Bankers Association (MBA) reported the results of its Builder Application Survey (BAS), which showed that in September mortgage applications for new home purchases fell 13.2% from a year earlier. Applications were also down 7% from August. The results were not adjusted for seasons patterns, MBA said.
The BAS tracks application volume from mortgage subsidiaries of home builders across the country. Utilizing this data, as well as data from other sources, MBA provides an early estimate of new home sales volumes at the national, state, and metro level. This data also provides information regarding the types of loans used by new home buyers. Official new home sales estimates are conducted by the Census Bureau on a monthly basis. In that data, new home sales are recorded at contract signing, which is typically coincident with the mortgage application.
MBA estimated that new single-family home sales, which have consistently been a leading indicator of the U.S. Census Bureau’s New Residential Sales report, were running at a seasonally adjusted annual rate of 637,000 units in September 2022, based on data from the BAS. The new home sales estimate is derived using mortgage application information from the BAS, as well as assumptions regarding market coverage and other factors, the MBA said.
The seasonally adjusted estimate for September is a decrease of 8.9% from the August pace of 699,000 units. On an unadjusted basis, MBA estimates there were 52,000 new home sales in September 2022, a decrease of 10.3% from 58,000 new home sales in August.
By product type, conventional loans comprised 69.8% of loan applications, FHA loans comprised 18.7%, RHS/USDA loans comprised 0.3% and VA loans comprised 11.2%. The average loan size of new homes decreased from $415,594 in August to $406,767 in September.
“New home purchase activity declined in September as prospective homebuyers pulled back in response to higher mortgage rates, increased concern about an impeding recession, and a broader slowdown in home-price growth,” said Joel Kan, MBA’s vice president and deputy chief economist. “The average 30-year fixed mortgage rate increased almost a full percentage point in the last month, greatly reducing the purchasing power of many home shoppers. MBA’s estimate of new home sales declined 9% in September, partially reversing the 18% increase in August during that brief period when mortgage rates decreased.”
He added, “The average loan size measured in the survey fell for the fifth consecutive month — after reaching a survey high in April 2022 — to $406,767.”
NAHB Chief Economist Robert Dietz said 2022 will be the first year since 2011 to see a decline for single-family housing starts.
“And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues,” Dietz said. “While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.”
