Housebuilder confidence deteriorated again in November, but could the worst be over?
High mortgage rates once again weighed on homebuilders this month, with pessimism over housing conditions deepening for the fourth straight month.
More builders rated housing conditions as poor than good in November, according to a monthly sentiment index from the National Association of Home Builders (NAHB) and Wells Fargo Housing. The index fell to 34 from 40 in September, the lowest reading since December 2022, and for the third month in a row it fell below the key break-even point of 50.
The deterioration was worse than expected. Economists polled by Bloomberg expected a reading of 39.
However, the index was taken before the latest measure of inflation showed consumer price growth moderating further, which could lead to an improved outlook for interest rates.
“While construction sentiment fell again in November, recent macroeconomic data point to improving homebuilding conditions in the coming months,” NAHB chief economist Robert Dietz said in a statement.
He added: “In particular, the 10-year Treasury interest rate has returned to the 4.5% range for the first time since late September, which will help bring mortgage interest rates closer to 7.5% or lower. Given the shortage of existing home inventory, to some extent “. Lower mortgage rates will impact housing demand and are likely to pave the way for improving builders’ views on market conditions in December.
Regardless, November was bleak. Other index readings slid further into pessimistic territory this month.
Builders’ expectations for current sales conditions fell to a reading of 40 from 46, while their expectations for sales in the next six months fell to 39 from 44. Their outlook on the movement of potential buyers was particularly negative, falling to a reading of 21 from 44. Oct. 26, the NAHB found.
Housing conditions declined in all four regions covered by the index in November, with all four regions recording readings below 50.
Mortgage rates are largely responsible for pessimistic attitudes. At the beginning of the month, the interest rate on a 30-year fixed mortgage — the most common home loan for purchases — was closer to 8% than 7%. To stimulate sales, builders had to reduce their profits by offering price reductions and other incentives, such as mortgage interest rate reductions, where the builder pays upfront costs to lower the interest rate on the home loan.
In November, 36% of builders cut home prices, up from 32% in the previous two months and the highest share since November 2022. Overall, 3 in 5 builders offered some type of sales incentive this month.
However, the decline in this month’s index largely reflects sentiment among small and private builders that make up the bulk of the NAHB survey. This is supported by the monthly BTIG/HomeSphere survey, which polls 75 to 125 small and medium-sized homebuilders nationally.
By contrast, executives at public construction companies like Dr. Horton (DHI)Societies of the century (CCS)LGI Homes (LGIH)And entitlement homes (meth)He pointed out that the movement of buyers did not stop in the fall in recent corporate earnings reports.
The latest survey found that sales and traffic trends have worsened among these builders, despite “easy year-over-year comparisons,” Carl Reichardt, a homebuilding analyst at BTIG, wrote in a note.
“The bottom line: Our survey indicates that new home demand trends remain too slow for private builders. Public builders told a somewhat different story from October in September quarter conference calls,” Reichardt wrote. “We believe the availability and cost of capital as well as the ability to afford clients’ mortgage rates all work to the advantage of larger/public builders in the current environment.”
This rate environment can change.
This week, the government reported that “core” inflation in October — which strips out volatile energy and food price components — rose at the slowest annual pace since September 2021. That followed a jobs report that showed a slowdown in hiring. These data points could support a move away from raising interest rates by the Fed.
Already, mortgage interest rates have retreated, falling to 7.50% last week, the largest one-week decline since November 2022. The latest interest rate reading is released at noon EST on Thursday.