Homebuilders slash prices to clear inventory as confidence sinks again in November

Homebuilders

Elevated mortgage rates sank builder confidence again in November, but recent economic data suggests housing conditions will pick up in the coming months.

Builder confidence dropped six points to 34 in November, the fourth consecutive monthly drop, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The data collected for the survey was submitted ahead of Tuesday’s release of the October Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics.

The HMI index gauges NAHB members’ perception of current single-family home sales, expected sales for the upcoming six months and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that homebuilders view conditions as favorable; and lower than 50 indicates that builders view conditions as unfavorable.

On the construction side, homebuilders as well as land developers found it hard to finance projects because of high short-term interest rates. On the consumer side, a large number of prospective buyers sat on the sidelines as housing affordability worsened.

Shelter remained the largest contributor to inflation in October, according to the CPI report. However, the rate of housing inflation is steadily falling and there are high hopes that interest rates will fall in 2024.

“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” NAHB Chief Economist Robert Dietz said in a statement.

“In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%. Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December.”

NAHB forecasts approximately a 5% increase for single-family housing starts in 2024 as financial conditions ease.

Homebuilders continued to make adjustments to boost their sales

According to the survey, 36% of builders cut home prices, up from 32% in the previous two months. It was the highest share of builders cutting prices recorded in one year.

According to the NAHB, the average price discount remained at 6%, unchanged from the previous month.

All three major HMI indices posted declines in November. Homebuilders’ gauge of current sales conditions fell to 40. The gauge measuring traffic of prospective buyers declined to 21. And the component charting sales expectations over the next six months fell to 39.

The three-month moving averages for HMI all declined across the four major regions in November. The Northeast fell one point to 49; the Midwest dropped three points to 36; the South fell seven points to 42; and the West posted a six-point decline to 35.

ENB
Sandstone Group