U.S. homebuilder sentiment dropped in July to its lowest level since the start of the Covid-19 pandemic. A startling new report found that rising inflation and lending rates is proving an immediate hurdle to home construction.
This morning, the National Association of Home Builders (NAHB) announced that the Housing Market Index (HMI) dropped for the seventh consecutive month this year. Indeed, the HMI fell to 55, the lowest level since May 2020, and well below June’s 67 reading.
The HMI is a survey that reflects homebuilders’ sentiment regarding current market conditions and their ability to sell their homes. A score of 50 is equivalent to a neutral sentiment. Levels above the 50 threshold reflect a positive view of the housing market, and vice-versa.
As such, this month’s drop to 55 displays a rapidly deteriorating building environment. In fact, July’s reading fell under the vast majority of projections and estimates, some, by drastic margins. Reuters‘ poll of economists anticipated a median index score of 65. The 12-point drop comes as the second greatest plunge since the index began in 1985. This drop is only overshadowed by the Covid-19-induced 42-point loss in April 2020.
The index is still over 50, albeit barely, but may come as a warning sign for those hoping for a continued bull market. The housing market has been in a weird place all year. Rising lending rates have aggressively staved off the demand for homes. However, the limited supply of real estate in the U.S. has meant prices have largely only continued to rise.
Homebuilder Sentiment May Be Red-Flag For Cooling Housing Market
The construction of homes has remained a point of friction in the U.S. Currently the U.S. has a roughly two-month supply of available homes for sale. It’s a far cry from the six-month historical average. This is also the reason why, even as buying conditions rapidly deteriorate, home prices have been stagnant — or even increased.
With a potential 75 or 100 basis-point interest rate hike on the way later this month, many expect home prices may finally feel the pinch of a constrained market. After all, mortgages rates are climbing, completed home sales have fallen in the past four months, and inflation continues to rear its ugly head. Unfortunately, today’s homebuilder report doesn’t bode well for that thesis.
If homebuilders believe they’re unlikely to sell newly built homes within the next six months, they very well may not build them. This would only put additional supply pressure on homes and continued price growth.
NAHB Chairman Jerry Konter, commented on the current situation and the low homebuilder sentiment:
Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home. In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations.
On Tuesday, the Department of Commerce is set to deliver its monthly report on new residential construction in June. Hopeful-homebuyers and builders alike will be watching closely for signs of life in the industry.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
