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- Sentiment has dropped for an eighth straight month.
- About 1-in-5 home builders surveyed reported reducing prices to increase sales, slow cancellations.
- The three major HMI components posted declines and each fell to their lowest level since May 2020.
After blistering months of increased prices, there’s a strong consensus among U.S. homebuilders that there is a “housing recession.”
In August, U.S. homebuilder sentiment (HMI) is seeing the market for single-family homes dip into negative territory a month after one of the most significant single-month drops in its 37-year history says the latest report from the National Association of Home Builders (NAHB) and Wells Fargo.
The index fell 6 points to 49 this month, the eighth straight month of low sentiment.
Typically, a score of 50 or above is considered positive.
“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” NAHB Chief Economist Robert Dietz said in Monday’s report.
The current sentiment gauge comes as it’s becoming even tougher to buy a home much less get a mortgage as the Federal Reserve raised interest rates by another 75 basis points late last month.
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What is homebuilder sentiment?
Every month, the NAHB/Wells Fargo Housing Market Index surveys the attitudes of its more than 140,000 members on the state of the housing industry.
Dietz said Monday that August’s score of 49 marked “the first time since May 2020 that the index fell below the key break-even measure of 50.”
Dietz maintains that various experts still estimate that a housing shortfall in the U.S. ranges from 1 million to nearly 4 million homes. He has said It now takes about eight months or longer to build a new home, compared with about four to six and a half months before the COVID-19 pandemic, Dietz said.
However, Heather Harmon, head of Opendoor Finance, said Monday the NAHB’s survey is not as alarming as some may think.
“It’s not a surprising report, it’s just an indicator of where we are in the market,” Harmon said. “Maybe we are not in a housing recession but in more of a housing correction.”
What is a housing recession?
There’s no precise definition of what a housing recession is, Dietz said.
He said a recession can occur in housing when there is a period of time when “a number of key metrics are showing weaknesses.”
For example, Dietz cites that single-family permits are down 4% in the first half of 2022 compared to the first half of 2021, the index falling below 50, and, more importantly, home builder sentiment has fallen for the last eight months.
“That should show there is a problem,” Dietz said. “When you combine all of that and add on clearly slowing home price decline in some local markets, that’s a fairly good indication of what a housing recession looks like.”
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Is now a good time to buy a house?
Los Angeles-based real estate investing adviser André Stewart, CEO of InvestFar, a startup, told USA TODAY last month now is not a good time to buy a home.
“I think the housing market is already experiencing a correction as interest rates are astronomically high,” Stewart said. “The Fed is going to have to lower rates by the beginning of next year to get us out of a recession and help stabilize the economy.”
Why are home builders still seeing declines?
The home builders’ monthly survey continues to show declines in three major HMI components. Current sales conditions dropped 7 points to 57; Sales expectations for the next six months slid 2 points to 47; And a key metric, the traffic of prospective buyers, fell 5 points to 32 after falling 11 points to 37 in July.
The HMI survey said about roughly 1 in 5 (19%) home builders reported reducing prices in the past month to increase sales or limit cancellations, Dietz said.
Additionally, Dietz said about 69% of builders in the survey reported higher interest rates as the top reason behind falling housing demand.
Will home builders see relief soon?
Unlikely, Dietz later told USA TODAY.
“We’re in a cyclical decline due to the rising mortgage interest rates,” he said. “We do have to build more housing, but with interest rates where they are now, you are going to have this temporary pullback in housing demand. We’re going to have to build our way out of a larger structural deficit.”
In the three-month moving average, builder sentiment in the Northeastdropped 9 points to 56, while falling 3 points in the Midwest to 49. In the South, a hotbed for housing, the sentiment fell 7 points to 63, and in the West, where home prices are highest in the U.S, sentiment plunged 11 points to 51.
Dietz said there’s some slight hope ahead as the building needs may offer “a pretty good runway for growth” due to additional needs for housing.
“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011,” he said. “However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”