Home Builders Warn Collapse Is ‘Unsustainable’—And Prices Could Tumble Another 20%

Topline

Home builder confidence plunged for a tenth straight month in October as rising interest rates continued to weaken housing demand—prompting economists to warn an unexpected rise in new home sales last month may be short-lived and prices may be on the brink of collapse, the National Association of Home Builders reported Tuesday.

Excluding a historic two-month plunge at the start of Covid, home builder confidence has tanked to … [+] its lowest level in a decade.

Key Facts

Builder confidence in the market for new homes dropped 8 points to 38—just half the level of six months ago and its lowest level since 2012—excluding the historic plunge at the start of the pandemic in 2020, according to the NAHB/Wells Fargo Housing Market Index released Tuesday.

The NAHB called the ongoing collapse of confidence further evidence that rising interest rates, building material bottlenecks and still-elevated home prices continue to weaken the housing market, noting traffic of prospective buyers has also slumped to the lowest level in a decade, while the outlook for sales also worsened.

In a statement, the association’s chair, Jerry Konter, said skyrocketing mortgage rates have created an “unhealthy and unsustainable situation,” noting this year will likely mark the first since 2011 to see a decline in the number of housing starts, or homes on which construction starts.

Others are similarly bearish: In emailed comments, Pantheon Macro chief economist Ian Shepherdson said the “disastrous” figures make it clear that the reported jump in new home sales last month “was much more noise” than indicative of a turnaround—especially as the latest surge in mortgage rates (to nearly 7%) threatens to further tank demand.

As a result, Shepherdson predicts construction and new home sales will continue to fall until early next year—pushing prices down by about 15% to 20%; the median price is already down to $436,800 from a record $466,300 this summer.

Wells Fargo economist Charlie Dougherty agrees, projecting median new home prices will fall nearly 7% next year with “disproportionate” losses in some housing markets that were particularly booming during the pandemic.

Crucial Quote

“While some analysts have suggested that the housing market is now more balanced, the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers,” says NAHB chief economist Robert Dietz.

Key Background

Skyrocketing prices have forced central banks around the world to reverse pandemic-era policy measures meant to bolster markets—and the Federal Reserve’s rate hikes hit the formerly booming housing market particularly hard. New home sales plunged to a six-year low this summer, and plunging mortgage applications suggest the collapse will only get worse. Fed Chair Jerome Powell has several times alluded to the housing market’s “complicated situation” this summer, saying prices will cool as mortgage rates normalize at higher levels after remaining historically low during the pandemic.

What To Watch For

The home builder release kicks off a busy week for new data on the housing market. On Wednesday, the Census Department is slated to release its monthly report on housing starts, and the National Association of Realtors on Thursday will report existing home sales for last month.