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Economic Report: Home builders sentiment index falls for record tenth month in a row in October. Home builders say the ‘situation is unhealthy and unsustainable.’

The numbers:  The National Association of Home Builders’ (NAHB) monthly confidence fell 8 points to 38 in October, the trade group said on Tuesday.

It’s the tenth month in a row that the index has fallen.

Outside of the pandemic, the October reading of 38 is the lowest level since August 2012.

A year ago, the index stood at 80.

The index’s ten-month drop is a new record. The index last fell for 8 months straight in 2006 and 2007.

Key details: All three gauges that underpin the overall builder-confidence index fell.

The gauge that marks current sales conditions fell by 9 points. 

The component that assesses sales expectations for the next six months fell by 11 points.

And the gauge that measures traffic of prospective buyers fell by 6 points.

All four NAHB regions posted a drop in builder confidence, led by the south and the west. 

It’s also likely that this year will be the first time since 2011 that single-family starts see a decline, the NAHB added.

Big picture: Builders continue to struggle to find buyers with the current rate environment.

Now they’re saying they’re worried about that depressed demand impacting supply moving forward.

Specifically, they’re concerned about housing affordability worsening, with potentially fewer new homes being built in the future.

Mortgage rates have doubled from last year, now exceeding 7%, which has considerably cooled buyer demand. 

Home price growth is moderating, but prices have not come down substantially — yet. 

The median sales price for a new home was $436,800 in August, according to the U.S. Census Bureau.

What the NAHB said: Builders are expecting single-family starts to fall for the first time in 11 years — and expect additional declines through 2023, said NAHB Chief Economist Robert Dietz, due to the Federal Reserve’s projected rate hikes to control inflation.

While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates, and ongoing elevated construction costs continue to price out a large number of prospective buyers,” he added.

“This situation is unhealthy and unsustainable,” Jerry Konter, a home builder and developer from Savannah, Ga. and the NAHB’s chairman, said in a statement.“Policymakers must address this worsening housing affordability crisis,” he added.

What are they saying? “Disastrous, and no bottom yet,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note.

“The plunge in the NAHB index makes it clear that the reported jump in new home sales in September was much more noise than signal. In short, housing is in free-fall,” he added. “So far, most of the hit is in sales volumes, but prices are now falling too, and they have a long way to go.”

“The housing sector – sentiment, building activity and sales – is collapsing under the weight of a rapid increase in interest rates and elevated prices, which are crimping affordability and demand,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a note.

So expect building activity to be depressed, she added.

Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
4.144%

fell to 3.98% on Tuesday morning.

While the SPDR S&P Homebuilders ETF
XHB,
+0.95%

traded slightly higher during the morning session, and the big home-builder stocks, from D.R. Horton Inc.
DHI,
+1.67%

to Toll Brothers
TOL,
+1.36%

to Lennar
LEN,
+1.82%
,
edged higher.

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