The numbers: With no clear end in sight to high home prices and supply-chain struggles, home-building firms are growing increasingly concerned about the state of the housing market.
The National Association of Home Builders’ monthly confidence index fell five points to a reading of 75 in August, the trade group said Tuesday. It represents the lowest level for the index in 13 months — at that time, the housing market was still reeling from the onset of the pandemic, and the home-buying craze of the past year was just beginning to take shape.
“Buyer traffic has fallen to its lowest reading since July 2020 as some prospective buyers are experiencing sticker shock due to higher construction costs,” said Chuck Fowke, a Tampa, Fla.-based custom home builder and chairman of the National Association of Home Builders. “Policymakers need to find long-term solutions to supply-chain issues.”
Index readings over 50 are a sign of improving confidence. Last year, the index quickly dropped below 50 in April and May as the pandemic began, but confidence rebounded as many Americans opted to resume their search for a new home last summer.
What happened: Two of the three gauges that underpin the overall builder confidence index also experienced five-point declines, including the index that measures current sales conditions and the component that tracks traffic of prospective buyers. The gauge that assesses sales expectations for the next six months remained unchanged from the previous month.
Regionally, every part of the country experienced a decline in confidence among home builders, led by a three-point drop in the South.
The big picture: Other data points to home builders taking a more cautious approach to the housing market. A monthly survey of small- and mid-sized home builders across the U.S. from analysts at BTIG found that sales and traffic trends continue to run ahead of expectations for a 42% plurality of builders rather than below, even though sales and foot traffic are experiencing something of a slowdown.
Notably, only 86% of builders surveyed by BTIG said they raised base prices in July, versus 94% of builders the previous month. “We view this moderation in price increase activity as positive, decreasing the risk of a ‘negative feedback loop’ where builders are forced to reduce price and potentially depress rather than increase demand,” the BTIG analysts wrote.
Much will depend on how willing buyers are to stomach high home prices, especially given the potential for mortgage rates to increase if the Fed begins to taper off its pandemic-related economic measures. The shortage of existing homes for sale and the supply-chain challenges builders continue to see are likely to keep home prices elevated. That will scare off some home buyers, who will decide to wait for the market to cool before taking the plunge to purchase a home.
What they’re saying: “While the demographics and interest for home buying remain solid, higher costs and material access issues have resulted in lower levels of home building and even put a hold on some new home sales,” said Robert Dietz, chief economist for the National Association of Home Builders. “While these supply-side limitations are holding back the market, our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions.”
Market reaction: Home-builder stocks, including Lennar Corp. /zigman2/quotes/202536373/composite LEN -0.91% Toll Brothers Inc. /zigman2/quotes/201912487/composite TOL -0.76% D.R. Horton Inc., /zigman2/quotes/202032328/composite DHI -0.71% and PulteGroup Inc. /zigman2/quotes/201694804/composite PHM -0.76% experienced declines Tuesday morning. The S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.11% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.21% were also down Tuesday morning, but experienced less pronounced declines.