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November 19, 2018 1:15 PM, EST

Homebuilder Confidence Drops by Most Since 2014

Construction site Daniel Acker/Bloomberg News

Confidence among U.S. homebuilders plummeted by the most since 2014 as the highest borrowing costs in eight years restrained demand, adding to signs of a cooling housing market that will weigh on the Federal Reserve’s debate over how far to raise interest rates.

The National Association of Home Builders/Wells Fargo Housing Market Index dropped eight points in November to 60, the lowest level since August 2016, according to a report Nov. 19. That compared with the median estimate of economists for a one-point drop to 67.

Shares of homebuilders initially fell and 10-year Treasury yields erased gains after the report, which represents one of the first breaks in elevated levels of business and consumer confidence that have persisted since Donald Trump was elected president in November 2016. While the index remains in positive territory, the group called on policymakers to take note of the housing situation as a possible warning sign about the broader economy.

A housing slowdown may have implications for how far the central bank will extend its run of eight interest-rate hikes since late 2015. The Fed is expected to raise interest rates in December and also will update projections that in September showed a median outlook of three quarter-point hikes next year.

Home spending graph

“Rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall,” NAHB Chief Economist Robert Dietz said in a statement accompanying the data. “Given that housing leads the economy, policymakers need to focus more on residential market conditions.”

The NAHB sub-index measuring current sales fell seven points to 67, the lowest since August 2016, while the index for the six-month outlook for transactions dropped 10 points to 65, the lowest since May 2016. A measure of prospective buyer traffic declined eight points to 45, also the lowest since August 2016.

The buyer-interest gauge is “pretty weak” and may be even more concerning if it stays below 50 for a few months, Barclays economist Blerina Uruci said.

“The housing market continues to be in the recovery phase, but I see it as losing momentum now, as that recovery softens, as we get late in the business cycle,” Uruci said.

Other reports this week are expected to show a more stable housing-market picture, with starts and existing-home sales projected to rise slightly in October, despite the headwinds. The Mortgage Bankers Association said last week the average rate on a 30-year fixed mortgage rose to 5.17%, the highest since April 2010.

The stalling in the housing market will be a part of the Fed’s debate at its meeting Dec. 18-19, when investors expect the central bank to raise the nation’s benchmark short-term interest rate for the fourth time this year. The Fed and private economists generally expect growth to cool from its strong pace in the second and third quarters of 2018; some analysts see the possibility of a recession in 2020 as the effects of fiscal stimulus fade.

At the same time, a softening housing market may not be as much of a negative for the economy as during the previous expansion. Residential investment accounts for about 3.9% of gross domestic product now, compared with 6.7% in 2005. The homebuilder index still is above 50, indicating more builders view conditions as good rather than poor.

Previous extended declines in the homebuilder index — which dates to 1985 — have preceded the past three recessions. The drop in early 2014 — a year the housing market slumped — was followed by a rebound as it recovered.