With soaring interest rates, homebuilder confidence continues to plunge. The metric declined for the 10th straight month in October, with continued weakening in demand. In September, there was an unexpected rise in new home sales, but economists were quick to warn that it would likely be short-lived. The National Association of Home Builders recently said that prices could be on the brink of collapsing.
Builder confidence dropped to 38 in the most recent data, which represented a decline of eight points. It’s at half of where it was six months ago, and it’s at the lowest level since 2012, not including the plunge at the start of the pandemic in 2020, which was historic.
The National Association of Home Builders said the continued collapse in confidence is evidence that rising interest rates, bottlenecks for building materials, and elevated home prices are weakening the housing market. Possible buyers' traffic has decreased to the lowest level in a decade, and sales outlooks are getting worse.
The chair of the association, Jerry Konter, said in a statement that the spiking mortgage rates had created a situation that’s unhealthy and unsustainable. He said this year would probably be the first since 2011 to see a drop in the number of housing starts, which are homes on which construction begins.
Other analysts and economists share a similarly bearish outlook. Ian Shepherdson, the chief economist at Pantheon Macro, said the disastrous numbers make it apparent that the reported jump in the sale of new homes last month was more noise than an indicator of a turnaround, especially with the most recent surge in mortgage rates.
Shepherdson predicts that construction and the sale of new homes will continue going down until early 2023, with home prices decreasing by 15% to 20%.
Charlie Dougherty, a Wells Fargo economist, predicts that median new home prices will go down almost 7% next year, with some housing markets seeing disproportionate losses. He considers those markets with the most losses the ones that experienced big booms in the height of the pandemic.
Chief Economist for NAHB, Robert Dietz, said that some analysts have indicated the housing market is more balanced now. Still, the reality is that the homeownership rate will decline in the upcoming quarters because construction costs and interest rates will stay elevated. Those converging effects will price out many prospective buyers.
High prices worldwide have led central banks to have to reverse some of their pandemic policies put in place to shore up markets. The Federal Reserve’s interest rate hikes have been aggressive and incredibly impactful to the booming housing market during the pandemic.
This summer, new home sales went down to a six-year low, and the significant drops in mortgage applications indicate the collapse will deepen and worsen.
Jerome Powell, the Fed Chair, has repeatedly indicated that home prices are going to cool as rates normalize after historic lows during the pandemic.
We don’t know exactly how much more home prices have to go down, but it’s possible they’re just starting a steep decline.