Rising mortgage rates are affecting builders’ confidence
Current data on housing starts exceeded estimates; However, a closer look at the builder confidence report shows that the recent rise in mortgage rates, which is approaching 7.25%, has negatively affected builder sentiment.
Since the end of 2022, our analysis indicates that mortgage interest rates in the 6%-6.5% range are positive for sales growth, while interest rates of 7% and higher – especially 7.50% or higher – have a significant impact on the data from the builders. So let’s take a look at the report to see what happens.
By Census: Housing begins: The number of private homes completed in December was 1,499,000 on an annual basis, seasonally adjusted. This is 15.8 percent (±14.4 percent) above the revised November estimate of 1,294,000, but 4.4 percent (±11.3 percent)* below the December 2023 figure of 1,568,000.
Construction permits: Private homes granted planning permission in December reached a seasonally adjusted annual figure of 1,483,000. This is 0.7 percent below the revised figure of 1,493,000 in November and 3.1 percent below the figure of 1,530,000 in December 2023.
When analyzing data on new home sales and home starts, it’s important to remember this rule of thumb. Whenever you see a significant increase or decrease in a month-to-month print, it is typically revised again to align with the overall trend. Therefore, it is essential to keep a close eye on builders’ forward-looking prospects. As shown below, permit-related housing activity remains minimal, with permits for single-family homes – crucial for the market – growing slowly.
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Over the past month, a significant change has occurred: the builder’s sales prospects have plummeted. The index fell from 66 to 60, which represents a decline of 6 basis points. Historically, such a decline has served as a reliable indicator of upcoming shifts in the market cycle. We have recently seen fluctuations in this data due to changing interest rates. With mortgage rates approaching 6%, builders became increasingly confident about selling homes. Now that interest rates have risen above 7%, the forward-looking confidence indicator has fallen.
From the Survey among builders: “The component measuring sales expectations over the next six months fell six points to 60 due to the elevated interest rate environment.”
Let me make things clear: 2024 housing starts were the lowest in five years. The number of newly completed new-build homes for sale has risen to 120,000. The total number of completed units reported in the housing starts report has recently decreased. In August 2024 there were 1,763,000 completed takeoffs, but this number has now dropped to 1,544,000.
With confidence in the market declining, mortgage interest rates above 7% pose challenges for builders. However, in recent years, mortgage interest rates between 6% and 6.5% have been more effective at stimulating housing market activity. On Thursday, Fed President Chris Waller tried to cut mortgage rates because of this chart in an effort to make housing financial conditions less restrictive.
The Federal Reserve cannot afford for another sector to experience job losses like manufacturing in 2024, while maintaining the unemployment rate target of 4.3% or lower. I discussed this today on the HousingWire Daily podcast.
While rates in the 6-6.5% range are not as low as the 3.25% to 5% rates we have experienced over the past decade, that range should still facilitate the construction of more housing.
