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Economic Report: U.S. home builder confidence plunges in July, NAHB reports

The numbers: The National Association of Home Builders’ monthly confidence index plunged 12 points to 55 in July, the trade group said Monday.

The decline was much larger than expected. Economists surveyed by the Wall Street Journal expected the number to be 66.

It is the second largest decline in the history of the index.

One year ago, the index stood at 80. The July reading of 55 was the lowest since May 2020.

Key details: The three gauges that underpin the overall builder-confidence index declined. The gauge that measures current sales conditions fell by 12 points; the component that tracks traffic of prospective buyers fell by 11 points; and the gauge that assesses sales expectations for the next six months fell by 11 points.

Builder confidence was gloomy across the country: The Northeast fell by 6 points; Midwest by 4; the South by 8; and the West by 12.

Big picture: The slowdown in the interest-rate-sensitive housing market is in full effect because of the Federal Reserve’s battle against high inflation. The average rate for a 30-year fixed-rate mortgage rose 21 basis points to 5.51% for the week ending July 14, according to Freddie Mac.

The number of mortgages applied for by homebuyers also dropped for the second week in a row, by 1.7% for the week ending July 8, according to the Mortgage Bankers’ Association. The average purchase loan size fell from $460,000 in March this year to $415,000.

What the NAHB said: “Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” NAHB Chairman Jerry Konter, a builder and developer from Savannah, Ga., said in a press release.

“In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations,” Konter added.

What are they saying? “This was an accident waiting to happen,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.

“Homebuilders have been in denial about the extent of the drop in demand, despite mortgage applications falling by more than a quarter over the first half of the year, with no end in sight to the decline. Now, they are acknowledging reality,” he added.

Shepherdson expects the index to fall further. “Pretty soon, anyone who has bought a home in recent months will be sitting on a loss,” he said.

Market reaction: The yield on the 10-year Treasury note

rose slightly to 2.99% before the market opened. While the SPDR S&P Homebuilders ETF

traded slightly higher during the morning session, the big home builder stocks, from D.R. Horton Inc

to Toll Brothers

to Lennar
edged lower.

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