- Builder sentiment fell for the ninth straight month in September, according to the National Association of Home Builders
- Last week, mortgage rates surpassed 6% for the first time since late 2008, when the August inflation report turned out to be worse than expected.
- On average, manufacturers have reduced their prices by 6%, according to the NABH.
By many you count, we are still in a seller’s market.
Home prices continue to rise in nearly all of the United States even as mortgage rates rise more and more. Inventory levels, typically used by real estate economists to gauge whether the market is favoring buyers or sellers, place the country exactly in a seller’s market.
But even with a housing supply of only 3.3 months – nearly half of what would be considered balanced – home builders are struggling to sell homes. Builder sentiment fell for the ninth straight month in September, according to the National Association of Home Builders / Wells Fargo Real Estate Market Index released Monday.
Although inventory levels are low, the shortage is felt most acutely at the lower end of the price spectrum. Starter homes or entry level homes, the most demanded segment, are not being built to adequate levels.
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According to the US Census Bureau, the share of new homes sold for less than $ 300,000 was 38% in 2020, 23% in 2021, and just 11% in the first seven months of 2022.
Jerry Howard, President and CEO of the National Association of Home Builders, told USA TODAY that focusing on the lower end of the price segment doesn’t make financial sense for builders.
“Given the cost of building materials, given the cost of regulatory compliance, it’s very, very difficult to build a starting house and still do it in pencil, no matter where you are in the country,” Howard says.
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Builder confidence in the newly built single-family home market fell three points in September to 46, the lowest level since May 2014 except for spring 2020, according to the index.
“Right now, the builders aren’t focused on any house as best I can say we’ve slowed down completely,” says Howard.
Why is builder sentiment low?
Last week, mortgage rates surpassed 6% for the first time since late 2008, as the August inflation report turned out to be worse than expected.
The average rate for a 30-year fixed-rate mortgage increased to 6.02% for the week ending September 15, according to Freddie Mac’s Primary Mortgage Market Survey. This time around last year, the rate stood at 2.87%.
“Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of the financial reach of many families,” said Jerry Konter, president of the National Association of Home Builders, home builder and developer from Savannah, Georgia.
Are Home Builders Lowering Prices?
“In another indicator of the weakening of the market, 24% of home builders reported that they had reduced house prices, up from 19% last month,” Konter says.
On average, builders cut their prices by 6%, according to the home builders association.
For the three-month moving averages for the regional real estate market index scores, the Northeast fell five points to 51, the Midwest fell five points to 44, the South fell seven points to 56, and the West recorded a drop of 10 points to 4.
Regional differences have to do with the diversity of their economies and the policies in place at the state and local levels, Howard says.
Are we in a real estate recession?
In general, a housing recession means a decline in economic activities related to the housing sector.
“There is no precise definition for this,” chief economist of the home builders association Robert Dietz told USA TODAY. “It’s a judgment call.”
But one of the leading indicators of a housing recession is a significant decline in single-family beginnings.
“2022 will see a decline, the first for a calendar year since 2011,” says Dietz. “The seasonally adjusted annual rate of single-family permits is now down 25% from the February peak to the August reading.”
In July, sales of new homes fell nearly 30% from a year ago.
Sales of existing homes also fell 20% year-over-year in July. The builder’s confidence level is generally low.
“Builder sentiment has declined every month in 2022 and the housing recession shows no signs of abating,” says Dietz. “In this weak market, more than half of the builders in our survey reported using incentives to boost sales, including mortgage rate buybacks, free services and price cuts.”
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What can politicians do to revive the real estate market?
Policy makers can help solve supply chain problems and negotiate a long-term stable agreement with Canada on importing Canadian lumber, Howard says.
“Right now, we’re in a real housing box and only politicians can get us out,” he said.
Builders are experiencing delays in receiving everything from concrete supplied from Mexico to transformers (whose components come from China) needed to generate electricity, to cabinets, toilets and tiles.
“The delay adds to the cost, the delay frustrates the consumer,” Howard says. “We have been off the COVID block for nearly two years, and this is a hangover.”
Swapna Venugopal Ramaswamy is a construction and economics correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.