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Uncertainty Over Fed Helps Sink Builder Confidence
With concerns over rising interest rates and housing affordability growing, single-family home builders continued this month to lose confidence in the marketplace, sending the NAHB/Wells Fargo Housing Market Index (HMI) for July down three points, to 39.
“The HMI is down from its most recent cyclical high of 72 in June of last year, and reflects growing builder uncertainly on the heels of reduced sales and increased cancellations related to eroding affordability as well as an ongoing withdrawal of investors/speculators from the marketplace,” said NAHB Chief Economist David Seiders.
“But just as concerning to many builders is the potential for more monetary tightening by the Federal Reserve that could drive interest rates, and thereby homeownership costs, even higher. Ironically, the Fed’s inflation-fighting moves have helped firm up the rental market and raise the ‘owners’ equivalent rent’ components of the core inflation measures that the Fed is seeking to contain,” Seiders added.
Derived from a monthly survey that NAHB has been conducting for 21 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales, sales expectations for the next six months and traffic of prospective buyers. Any number over 50 indicates that more builders view sales conditions as good than poor.
All three component indexes fell in July. Sales expectations showed the most substantial decline, dropping five points to 46. Current sales fell four points to 43 and buyer traffic was down two points to 27.
Builders in the West, who have been the most optimistic in the HMI for some time, lost the most confidence this month; the region skidded nine points on the index, dropping to 51. The Northeast was down five points, to 36; and the Midwest lost four points, falling to 21. Confidence was up two points in the South, the biggest region of the country for housing, rising to 50. Even so, this was down considerably from a cyclical peak of 77 last June.
“In terms of historical comparison, the HMI’s movement is essentially in line with readings from the 1994-95 period when the Federal Reserve tightened monetary policy and a fairly orderly cooling-down process occurred in the nation’s housing markets,” Seiders observed. “That is what our forecasts anticipate happening in the current period, provided the downside risks of rising interest rates and a bail-out by investors/speculators do not become too pronounced. With respect to interest rates, we expect the Federal Reserve to maintain the current 5.25% target for the federal funds rate for some time, and we’re projecting only modest increases in long-term interest rates from current levels.”
Stay tuned for what the Fed decides to do about interest rates on Aug. 8.
For more detailed tables on the HMI, click here.
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Find out in HousingEconomics.com’s State Starts Forecast (sample). The starts forecast includes downloadable Excel tables of total, single-family and multifamily starts by region and state.
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