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Homebuilder sentiment falls to 2-year low on declining demand and rising costs

Contractors work on concrete slabs in the Cielo at Sand Creek by Century Communities housing development in Antioch, California, on Thursday, March 31, 2022.
David Paul Morris | Bloomberg | Getty Images

Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher and building material costs showed no relief.

Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Readings above 50 are considered positive, but this is the fifth straight month that builder sentiment has declined.

It’s the lowest reading since June 2020, when builders had a brief, quick negative reaction to the beginning of the Covid pandemic before rapidly bouncing back. As the economy shut down, demand for single-family homes with outdoor space in the suburbs skyrocketed. Builder sentiment hit a record high of 90 by November 2020.

Taking out that pandemic effect, this month’s reading is the lowest since September 2019, when the U.S. trade dispute with China was taking a hard toll on building material supply chains.

“Housing leads the business cycle, and housing is slowing,” said NAHB Chairman Jerry Konter, a builder and developer in Savannah, Georgia.

Of the index’s three components, current sales conditions fell 8 points to 78, and sales expectations in the next six months dropped 10 points to 63. Buyer traffic fell 9 points to 52.

Buyers in April saw the average rate on the 30-year fixed mortgage jump from 4.88% to 5.41% and then hit a high of 5.64% in the first week of May, according to Mortgage News Daily. The rate started this year at just 3.29%. At the same time, builders saw inflation hit their costs hard.

“The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “Building material costs are up 19% from a year ago; in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.”

Entry-level buyers are being hardest hit by rising rates, but the drop in demand is showing up across all levels. Some surveys are also showing an increase in cancellation rates for new construction.

“We’re seeing an inflection point,” housing analyst Ivy Zelman said in an interview on CNBC’s “Closing Bell” on Monday.

“Our survey did see a pickup in cancellation rates,” Zelman said. “We did see a tick up in incentives, and some of the cancellations, we’ve heard from some of the hotter markets, were actually private investors.”

Regionally, on a three-month moving average, builder sentiment in the Northeast was unchanged at 72. In the Midwest, it fell 7 points to 62, and in the South it fell 2 points to 80. In the West, sentiment fell 6 points to 83.

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