Confidence among builders in the U.S. housing market unexpectedly fell in December to the lowest level in a decade as painfully high inflation and rising borrowing costs forced potential 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 12th consecutive month to 31, marking the worst stretch for the housing market since the survey launched in 1985.
Any reading above 50 is considered positive; prior to this year, the gauge has not entered negative territory since 2012, excluding a brief – but steep – drop in May 2020.
The index has fallen to half of what it was just six months ago, when it stood at 76. 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.
December's reading was below the median expectations among economists for an increase to 34 from last month's recording of 33.
"In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers," said NAHB Chairman Jerry Konter, a homebuilder and developer from Savannah, Georgia. "Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions."
The survey's measure of current sales conditions slid 3 points to 36, while its gauge of sales expectations over the next six months increased 4 points to 35. The component looking at the traffic of prospective buyers was unchanged at 20.
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades. Policymakers already approved six straight interest rate hikes, including four 75-basis-point increases in June, July, September and November, and have shown no sign of pausing as they try to crush stubbornly high inflation.
The average rate for a 30-year fixed mortgage fell to 6.31% last week, according to recent data from mortgage lender Freddie Mac. While that is significantly higher than just one year ago when rates stood at 3.12%, it's down from a peak of 7.08% notched in November.
With mortgage rates beginning to level off, there may be an end in sight for the decimation of homebuilder sentiment, according to NAHB chief economist Robert Dietz.
"The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment," Dietz said. "Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations."