Home builder confidence plunged to a two-year low in July as high inflation and supply chain constraints prompted many builders to halt construction on homes, the National Association of Home Builders reported Monday, marking the latest sign the housing market is due for a steep turnaround after the pandemic-era home buying frenzy.
Builder confidence in the market for new homes posted its seventh consecutive monthly decline in July, falling 12 points to 55 for its second-biggest single-month drop in history, according to the NAHB/Wells Fargo Housing Market Index released Monday.
The report also showed home builder expectations for both current and future sales have dropped sharply, pushing confidence to its lowest level since May 2020.
In a statement explaining the battered sentiment, NAHB Chair Jerry Konter said production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction, as the cost of land, construction and financing exceed a home’s market value in some cases.
Also hurting confidence, increased interest rates have driven up the cost of new mortgages by hundreds of dollars each month, on average, “dramatically slowing sales and buyer traffic,” the NAHB said.
In emailed comments, Pantheon Macro chief economist Ian Shepherdson said confidence has “further to fall,” noting that Federal Reserve Chair Jerome Powell last month alluded to the housing market’s “complicated situation,” saying potential home buyers “need a bit of a reset” as mortgage rates normalize at higher levels after remaining historically low during the pandemic.
“This is a meltdown,” says Shepherdson, noting home prices should soon start to drop and warning: “Pretty soon, anyone who has bought a home in recent months will be sitting on a loss.”
According to the NAHB, the only drop in confidence worse than this month’s occurred in April 2020, as rapidly spreading Covid cases forced historic action from the Fed to prop up the economy.
“The Fed has signaled it may increase interest rates further to combat stubbornly high inflation, which could harm consumer confidence, and lower stock prices mean fewer prospective home buyers can afford a down payment,” Daryl Fairweather, chief economist at real estate brokerage Redfin said in a statement last week.
Home buying demand skyrocketed during the pandemic as interest rates collapsed and an influx of Americans started working from home. However, the Fed’s rate hikes have quickly spurred a reversal. Mortgage originations jumped from $2.3 trillion in 2019 to more than $4 trillion in 2020 and 2021, but demand has since plummeted to the lowest level in more than two decades.