November Sees Homebuilder Confidence Drop, Signs of Improvement Ahead?

The recent resurgence in high mortgage rates has once again exerted pressure on homebuilders’ sentiments, perpetuating a four-month trend of growing pessimism towards housing conditions.

The National Association of Home Builders (NAHB) and Wells Fargo Housing’s monthly sentiment index for November revealed a shift in perspective, with more builders characterizing housing conditions as poor rather than good. The index plummeted to 34 from its September figure of 40, marking its lowest point since December 2022 and the third consecutive month below the critical threshold of 50.

This decline surpassed economists’ expectations, who had anticipated a reading of 39 according to a Bloomberg survey. However, the index data predates the recent moderation in consumer price growth, hinting at a potential positive influence on interest rates and subsequently, a brighter outlook for the future.

Despite the downturn in builder sentiment, NAHB’s chief economist, Robert Dietz, remains cautiously optimistic, citing recent macroeconomic indicators that signal potential improvements in home construction conditions ahead. Dietz highlighted the resurgence of the 10-year Treasury rate into the 4.5% range, potentially aligning mortgage rates to hover around or dip below 7.5%. Anticipating increased housing demand due to limited existing inventory, he predicts that relatively lower mortgage rates could stimulate buyer interest, potentially improving builders’ perceptions of market conditions in December.

However, November’s index revealed a bleak scenario across various metrics. Builders’ assessments of current sales conditions dropped from 46 to 40, while their expectations for future sales in the next six months decreased from 44 to 39. Particularly concerning was the notably adverse outlook on the traffic of prospective buyers, with the index plummeting from 26 in October to 21 in November, as per the NAHB’s findings.

The index’s coverage of housing conditions across four regions showcased a decline in November, all registering readings below the pivotal 50-mark.

The root cause behind this downtrend primarily resides in mortgage rates. At the onset of the month, the 30-year fixed mortgage rate, a staple in home purchases, hovered closer to 8% than 7%. To stimulate sales, builders had to resort to measures like price reductions and incentives such as mortgage rate buydowns, where upfront costs are borne by the builder to lower the home loan rate. In November, a notable 36% of builders slashed home prices—a marked increase from the preceding two months and the highest proportion since November 2022. Approximately three in five builders provided some form of sales incentives during this period.

However, the decline in the index for the month primarily reflects sentiments among smaller, private builders, constituting the major segment of NAHB’s survey. This aligns with findings from the monthly BTIG/HomeSphere survey, focusing on 75 to 125 small and mid-sized tract homebuilders nationwide.

Conversely, executives from public builders such as D.R. Horton (DHI), Century Communities (CCS), LGI Homes (LGIH), and Meritage Homes (MTH) reported sustained buyer traffic in their recent earnings reports, despite the latest survey indicating deteriorating sales and traffic trends among these builders. This dichotomy in perspectives was highlighted by BTIG homebuilding analyst Carl Reichardt, Jr., who emphasized the favorable positioning of public/larger builders in terms of capital availability, cost, and the ability to offer reduced mortgage rates to customers.

The ongoing dynamics in the rate environment could undergo changes. Recent government reports revealed a slowdown in core inflation and hiring in October, potentially supporting a shift away from imminent interest rate hikes by the Federal Reserve. In response, mortgage rates have started retracting, marking a significant one-week decline to 7.50%, the most substantial drop since November 2022. The forthcoming rate report will provide further insights into this evolving landscape.