Builder sentiment falls to a 2-year low on falling demand and rising costs

Contractors work on concrete slabs in the Cielo at Sand Creek residential area by Century Communities on Thursday, March 31, 2022 in Antioch, California.

David Paul Morris | Bloomberg | Getty Images

Builder sentiment in the single-family home market plummeted in May as mortgage rates soared and building material costs showed no signs of easing.

Sentiment fell a whopping 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Scores above 50 are considered positive, but this is the fifth consecutive month that home builder sentiment has fallen.

It’s the lowest since June 2020, when builders had a brief, rapid negative reaction to the start of the Covid pandemic, before quickly recovering. As the economy shut down, demand for single-family homes with outdoor space in the suburbs skyrocketed. Builder sentiment hit a record high of 90 by November 2020.

Excluding this pandemic effect, this month’s reading is the lowest since September 2019, when the US trade dispute with China severely affected building materials supply chains.

“Housing is leading the business cycle, and housing construction is slowing down,” said NAHB Chairman Jerry Konter, a builder and developer in Savannah, Georgia.

Of the three components of the index, current selling conditions fell 8 points to 78 and sell expectations in the next six months fell 10 points to 63. Buyer traffic fell 9 points to 52.

According to Mortgage News Daily, the average interest rate on the 30-year fixed-rate mortgage rose from 4.88% to 5.41% in April, then peaked at 5.64% in the first week of May. The rate started this year at just 3.29%. At the same time, builders saw that inflation was hitting their costs hard.

“The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “Building material costs have increased by 19% compared to last year; In less than three months, mortgage rates have risen to a 12-year high, and based on current affordability terms, less than 50% of new and existing home sales are affordable for a typical family.”

Beginners are hit hardest by rising interest rates, but the drop in demand is showing up at all levels. Some surveys also show an increase in cancellation rates for new builds.

“We’re seeing a tipping point,” housing analyst Ivy Zelman said Monday in an interview on CNBC’s Closing Bell.

“Our survey found an increase in cancellation rates,” Zelman said. “We’ve seen stimulus surge, and some of the cancellations we’ve heard from some of the hotter markets have actually been private investors.”

Regionally, homebuilder sentiment in the Northeast was flat at 72 on the three-month moving average. In the Midwest, it fell 7 points to 62 and in the South, it fell 2 points to 80. In the West, sentiment fell 6 points to 83. Builder sentiment falls to a 2-year low on falling demand and rising costs

Jane Marczewski

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