Economists are warning the U.S. housing market could be on the verge of a “meltdown.” The warning follows the recent release of data showing a collapse in home builder confidence in July.
Builder confidence plummeted 12 to 15 points to 55 in the month, according to the latest data released from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. Builder confidence has declined to the lowest level since May 2020 for seven straight months.
“Homebuilders have been in denial about the extent of the drop in demand, despite mortgage applications falling more than a quarter over the first half of the year, with no end in sight to the decline,” according to the chief economist at Pantheon Macroeconomics, Ian Shepherdson. “Now, they are acknowledging reality.”
“Pretty soon, anyone who has bought a home in recent months will be sitting on a loss,” added Shepherdson.
The association noted that confidence within the housing market has been sagging due to the impact of rising interest rates and soaring inflation, resulting in “dramatically slowing sales and buyer traffic.”
Mortgage rates have compounded competing difficulties for potential buyers who are trying to juggle high home prices and long-term commitments that spiked during the Covid-19 pandemic. According to Reuters, July’s numbers came in below expectations for all 31 economists polled. The July drop of 12 points month-over-month is the second largest on record since 1985.
Jerry Konter, NAHB chairman, said 13% of participating builders said they’d reduced house prices in the past month to attract buyers. “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,” said Konter in a statement released with the survey results.
Mortgage rates have increased steadily increased to their highest level in advance of expected tighter borrowing conditions as the Federal Reserve is poised to aggressively hike its benchmark interest rate in an attempt to combat inflation. The average contract interest rate on 30-year fixed-rate mortgages climbed to 5.51% for the week that ended July 14. A year ago, the same rate was hovering below 3%.
Growing number of economists predict a housing slowdown
A growing number of economists expect a housing slowdown as rising interest rates are expected in the upcoming months. However, experts believe the slowdown will not be as bad as the 2008 housing crisis that occurred with the subprime mortgage market implosion.
Shepherdson said, “Pretty soon, anyone who has bought a home in recent months will be sitting on a loss.”
Numerous factors are also contributing. According to Konter, “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.”
In the same release, Chief Economist of the NAHB, Robert Dietz, said the challenges of affordability have priced out a large portion of purchasers from the home market. Dietz warned to tackle the issue of affordable housing need to be addressed.
Moody’s Analytics Chief Economist Mark Zandi agrees with Dietz. In a recent interview with Newsweek, Zandi said, “High mortgage rates are combining with high house prices, and affordability is being crushed. So, first-time homebuyers are getting locked out of the market.”
Even before the recent release, some experts cautioned that the slowing of the increase in construction jobs, as seen in the recent jobs report, is a clear sign that a significant low in housing affordability will be reached in the U.S.
According to statistics by the NAHB, the only month when confidence was worse was in April 2020, when the pandemic was sweeping across the nation.