Homebuilder sentiment collapses in July to lowest level in 2 years
Homebuilder sentiment posts biggest one-month decline since April 2020
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Confidence among builders in the U.S. housing market plunged more than expected in July to the lowest level since the beginning of the COVID-19 pandemic as scorching inflation and rising borrowing costs forced buyers to pull back.
The National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, fell for the seventh consecutive month to 55, the lowest level since May 2020. It is the second-biggest, one-month decline in the survey's 37-year history.
While any reading above 50 is still considered positive, the index has fallen considerably from just one year ago, when it stood at 80. It peaked at a 35-year high of 90 in November 2020, buoyed by record-low interest rates at the same time that American homebuyers – flush with cash and eager for more space during the pandemic – started flocking to the suburbs.
"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," NAHB Chairman Jerry Konter, a home builder and developer, said in a statement.
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A for sale sign stands in front of a house, Tuesday, Oct. 6, 2020, in Westwood, Mass. ( (AP Photo/Steven Senne) / AP Newsroom)
July's reading was below the median expectations among economists for a decline to 65.
One of the index's components that measures current sales of single-family homes collapsed to 64 from 76. The gauge of single-family sales expectations over the next six months also dropped to 50 from 61, while the prospective buyer traffic index slipped 11 points to 37 – deeply in negative territory.
"The residential real estate market is in a contraction phase, not necessarily in a recession," said Jeffrey Roach, chief economist for LPL Financial. "But this hinges on the duration of historic inflationary pressures for home builders from high raw material prices and a tight labor market."
Signage stands outside the Freddie Mac headquarters in McLean, Virginia, U.S., on Tuesday, Oct. 1, 2019. (Photographer: Andrew Harrer/Bloomberg via Getty Images / Getty Images)
The decline was broad-based across the nation, with builder confidence in the West falling by 12 points, followed by an 8-point decline in the South and a 6-point decline in the Northeast. Confidence in the Midwest dropped by 4 points.
The data comes as the Federal Reserve races to catch up with runaway inflation with a series of historic interest rate hikes that are gradually pushing borrowing costs higher. The average rate for a 30-year fixed rate mortgage climbed to 5.51% for the week ending July 14, according to recent data from mortgage lender Freddie Mac.
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That is significantly higher than just one year ago, when rates stood at 2.88%.