Homebuilder sentiment falls to 2-year low on weaker demand and higher costs

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Contractors work on concrete slabs in the Cielo at Sand Creek by Century Communities housing development in Antioch, Calif., Thursday, March 31, 2022.

David Paul Morris | Bloomberg | Getty Images

Builder confidence in the single-family home market fell sharply in May as mortgage rates soared and building material costs showed no relief.

Sentiment fell 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo housing market index. Readings above 50 are seen as positive, but this is the fifth month in a row that builder sentiment has declined.

This is the lowest reading since June 2020, when builders had a brief and quick negative reaction at the start of the Covid pandemic before rebounding quickly. With the economy shutting down, demand for single-family homes with outdoor space in the suburbs has skyrocketed. Builder sentiment hit an all-time high of 90 in November 2020.

Excluding that pandemic effect, this month’s reading is the lowest since September 2019, when the U.S.-China trade dispute wreaked havoc on building materials supply chains.

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

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

In April, buyers saw the average 30-year fixed mortgage rate rise from 4.88% to 5.41%, then hit a high of 5.64% in the first week of May, according to Mortgage News Daily. The rate started this year at just 3.29%. At the same time, builders have seen inflation hit their costs hard.

“The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “The cost of building materials has increased by 19% compared to a year ago; In less than three months, mortgage rates have reached their highest level in 12 years, and under current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.”

Entry-level buyers are the hardest hit by the rate hike, but the drop in demand is showing across the board. Some surveys also show an increase in cancellation rates for new builds.

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

“Our survey saw an upturn in cancellation rates,” Zelman said. “We saw an increase in incentives, and some of the cancellations, which we heard about from some of the hottest markets, were actually from private investors.”

Regionally, on a three-month moving average, builder sentiment in the Northeast was unchanged at 72. 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. at 83.

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