Is Builder Optimism, New Home Construction Faltering?

The Mortgage Corner

Will new-home construction falter, now that interest rates are rising and consumers remain unsettled over Washington’s political gridlock that prevents any legislation being passed that would aid economic growth?

Builder confidence in the market for newly built, single-family homes was unchanged in November from a downwardly revised level of 54, reported the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This means that for the sixth consecutive month, more builders have viewed market conditions as good than poor, since any index value above 50 percent, means a majority of builders report growing activity. But that hasn’t spurred more new-home construction, which is stuck at early spring levels.

Graph: Calculated Risk

“Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

“Policy and economic uncertainty is undermining consumer confidence,” said NAHB Chief Economist David Crowe. “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.”

New-home construction has basically stalled since April and the beginning of interest rates increases due to the Fed’s hints that QE3 could end. This will hurt economic growth and employment, since new-home construction makes up a large part of economic growth these days, with other growth components are being constrained by lower government and consumer spending.

Graph: Calculated Risk

There has been a significant increase in new home sales this year.  Sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.9 percent above the revised July rate of 390,000 and is 12.6 percent above the August 2012 estimate of 374,000
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Though year-over-year increases have slowed - August only saw a year-over-year increase of 12.6 percent, but Calculated Risk’s Bill McBride still expects new home sales to be up 15 percent to 20 percent for the year.  That follows an annual increase of 21 percent in 2012.

The seasonally adjusted estimate of new houses for sale at the end of August was 175,000. This represents a supply of 5.0 months at the current sales rate. It means that new home construction has not taken up the slack in supply, and might slow new-home sales.

The initial third Quarter GDP growth was 2.8 percent, up from 2.5 percent in Q2. And residential real estate activity was a large part of that increase. So we will need more new-home construction to keep growth at that level.

Harlan Green © 2013

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