Affordability Squeezing Builder Confidence

As a result of rising mortgage rates and home price appreciation, affordability is tight, pushing down both buyer demand and home builder confidence. 

Builder sentiment dropped eight points in November 2018 to 60 points, the lowest reading on the National Association of Home Builders/Wells Fargo Housing Market Index since August 2016. In November 2017, builder confidence reading was 69 points. NAHB's chief economist, Robert Dietz tells CNBC, "For the past several years, shortages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction," adding, "While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall."

Of the index's three components, current sales conditions fell 7 points to 67, sales expectations in the next six months dropped 10 points to 65, and buyer traffic registered an 8-point drop to 45. Buyer traffic had broken out of negative territory earlier this year but now appears to be back in it solidly. Some of the nation's largest publicly traded homebuilders, like Lennar and KB Home, lowered their expectations for sales in 2019 in recent earnings releases. There is still a shortage of homes for sale, but newly built homes come at a price premium, and as interest rates rise, new home buyers are consequently hit hardest.

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