The confidence of builders has fallen to a post-pandemic low, the worst since 2012.
Builder confidence fell to 2012 levels in October, the National Association of Home Builders said Tuesday, further evidence that high mortgage rates and inflation are taking their toll on the housing market.
The NAHB index fell to 38, a level not seen in a decade with the exception of a dip in 2020 when the coronavirus pandemic hit. That is a reading half of what it was six months ago.
“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Georgia. “This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.”
The housing sector continues to suffer from the Federal Reserve’s pivot to a tight monetary policy and higher interest rates to thwart inflation. Mortgage rates have doubled over the past year, making the monthly cost of owning a home considerably more expensive even though home prices have moderated in most markets.
“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 buyer,” Robert Dietz, chief economist at NAHB, said.
The Fed is likely to keep hiking interest rates until next year, when some analysts believe it will take a pause to see whether inflation is cooling down from its current 8.2% annual pace.
“We have been cautioning investors that the Fed is willing to tolerate a recession if that is what it takes to reduce inflation,” Gargi Chaudhuri, head of iShares investment strategy, Americas, said on Tuesday. “However, that does not mean the Fed will act rashly and induce a recession unnecessarily. Growth is set to slow”
“In its latest summary of economic projections, the Fed downgraded its 2022 GDP (gross domestic product) estimate by 1.5 percentage point to 0.2% and its 2023 forecast by 0.5 percentage points to 1.2%,” Chaudhuri added. “Monetary policy typically works on a 6- to 12-month lag, which means we should only now be feeling the impact of the first hikes from March.”
Indeed, many economists believe a recession is now a certainty within the next 12 months.