Source: NAHB Eye On Housing

NAHB chief economist Rob Dietz responded to some questions we had about the rate of change in builder confidence:

The HMI decline highlights the erosion and crisis for housing affordability, particularly at the entry-level. The interest rate shock affecting prospective first-time buyers is clearly large. Keep in mind one in three homes marketed for sale is now newly-built (or newly-will-be-built as the case may be).  Historically that share is 13%.

As of May, the HMI is down 21 points from November 2020. This reflects the accumulation of challenges for builders, particularly with respect to the cost and availability of materials, as well as ongoing access issues with labor and lots. However, the HMI is still above 50, with many builders reporting ongoing solid demand despite the increase in rates.

That said, the combination of 5 straights months of decline and a 15 point drop since December 2021 confirm what we said last month – the housing market is at an inflection point and will soften in the months ahead.

The NAHB Economics forecast now includes a recession in 2023. That is, we are forecasting a hard landing for the economy as the Fed seeks to curb inflation by reducing consumer demand. Over the last seven decades, every time inflation has risen above 4% and the unemployment rate has fallen below 6%, a recession has followed.

Nonetheless, a housing deficit exists and demographics remain favorable over the long-run. However, cyclical factors will present near-term negatives as the buyers adjust to a higher path of mortgage rates.

The Biden administration has taken notice, issuing a housing supply strategy yesterday. It was not perfect.  As an economist, I wish it had included more on homeownership, for-profit builder conditions, and addressing the materials supply-chain, but it did include some items NAHB has raised as concerns or opportunities in recent years.

To date, we’ve seen a couple of instances of single-market private homebuilders going bust.

The trip-wires of timing, money owed, and money coming in may start sending more privately capitalized firms into a risk zone as far as loan covenants, and the ability to keep drawing on their lines despite unavoidable delays in construction cycles.

Bigger may not be better. But it might feel more comfortable to more players right about now.

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