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Tag: homebuilders

  • U.S. housing starts drop to lowest level since June 2020

    U.S. housing starts drop to lowest level since June 2020

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    The numbers: Construction of new U.S. homes fell 11.3% in August — falling short of Wall Street expectations — as builders scaled back new projects to focus on completions.

    The pace of construction reversed course and fell as mortgage rates stayed over 7%, dampening home-buying demand. The last time construction of new homes was at this level was in June 2020.

    So-called housing starts fell to a 1.28 million annual pace from 1.45 million in August, the government said Tuesday. That’s how many houses would be built over an entire year if construction took place at the same rate every month as it did in August.

    Economists on Wall Street were expecting a drop in starts to 1.43 million. All numbers are seasonally adjusted. 

    Housing starts peaked at 1.8 million in April 2022. 

    The number of homes started in July was revised downwards, to an increase of 2% to 1.45 million, from an initial reading of a 3.9% gain. 

    More from MarketWatch: Meet the brave Americans buying and selling their homes, despite stubbornly high interest rates

    New homes have dominated the housing market, but persistently high rates are beginning to spook home builders. In anticipation of waning demand, builders said they’ve started to ramp up price cuts to boost buyer demand in September, according to a survey by the National Association of Home Builders. 

    Building permits, a sign of future construction, rose 6.9% to a 1.54 million rate. That’s the highest level since October 2022.

    Key details: The construction pace of single-family homes fell by 4.3% in August, and apartment-building construction fell by 26.3%.

    But home builders ramped up single-family home construction in the South, where starts rose by 8.1% in August.

    Housing starts fell the most in the West, by 28.9%.

    Permits for single-family homes rose 2% in August, while permits for buildings with at least five units or more surged by 14.8%.

    Around 1.69 million homes were under construction as of August. 

    Big picture: Builders are increasingly concerned about how 7% rates will impact demand, and they’re pulling back on starting new developments as a result. 

    Builder confidence in September fell to the lowest level in five months, according to the NAHB. Home builders are increasingly offering incentives, including cutting prices. The share of builders cutting prices to boost sales rose to the highest level in nine months, the NAHB noted, going up to 32% in September from 25% the previous month.

    Nonetheless, given the long-term need for housing and a decade of underbuilding, builders may not see a sustained drop in demand. 

    What are they saying? Despite starts falling sharply in August, the uptick in building permits “suggests housing starts could pick up modestly again and today’s data could reflect some volatility,” CIBC Economics said in a note. “Nonetheless, the cooling in building activity is a good sign for the Fed which is expecting to limit housing market activity in an effort to contain inflation.”

    Rates have peaked, but “will remain elevated for the rest of the year,” Capital Economics wrote in a note. And this means that with “a slowing economy, we expect this will lead single-family starts to flatten-off at around 900,000 annualised until mid-2024, after which an economic recovery will help spur buyer demand and supporting renewed homebuilder confidence,” they added.

    Market reaction: U.S. stocks
    DJIA

    SPX
    were set to open higher early Tuesday. The yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    rose above 4.3%.

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  • U.S. housing starts surge as builders rev up single-family home construction in May, while a housing shortage drags on 

    U.S. housing starts surge as builders rev up single-family home construction in May, while a housing shortage drags on 

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    The numbers: Construction on new American homes jumped 21.7% in May, as homebuilders ramp up building single-family homes to meet strong demand from buyers.

    Housing starts rose to a 1.63 million annual pace last month from 1.34 million in April, the government said Tuesday. That’s how many houses would be built over an entire year if construction took place at the same rate in every month as it did in May.

    Economists were expecting a slight decline of about 0.8%. The numbers are seasonally adjusted.

    This is the second month in a row that starts are up. The pace of construction was the highest since last April, when starts hit a 1.8 million pace.

    The surge in construction this spring was led by the Midwest.

    Both single and multi-family construction rose in May. Keen interest from would-be home buyers is creating strong demand for new homes. These buyers continue to face a lack of options in the resale market. 

    Building permits, a sign of future construction, rose 5.2% to a 1.49 million rate.

    Key details: As the weather warms up, construction pace has picked up considerably.

    The construction pace of single-family homes rose 18.5% in May while apartment building rose 28.1%.

    Home builders were most active in the Midwest, where housing starts rose by 67% from the previous month. The Midwest also led the nation in terms of single-family construction.

    Permits for single-family homes rose 5.2% in May while permits in buildings with at five units or more rose 7.8%.

    Housing starts are up on an annual basis for the first time in nearly a year. The annual rate of total housing starts rose 5.7% from last May.

    Big picture: New construction is a bright spot in an otherwise despondent housing market. For the buyers who brave 6% mortgage rates, there are few options in the resale market, which continues to funnel demand for new homes. 

    In fact, demand is so strong that homebuilders are pulling back on sales incentives, such as price cuts, the National Association of Home Builders reported on Monday. 

    Builders also reported that they were feeling upbeat about the housing market for the first time in nearly a year.

    What are they saying? “To say that we did not see this one coming would not even come close to capturing the degree to which the May residential construction data caught us off guard,” Richard Moody, senior vice president and chief economist at Regions Financial Corporation, wrote in a note.

    “This is without question an exaggeration of the underlying reality and a reminder that the housing starts data are among the most volatile and random of the government’s major economic indicators,” Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, wrote in a note.

    “Having said that,” he added, “the housing sector broadly appears to be healing remarkably fast after enduring a historic shock in affordability last year, when 30-year mortgage rates more than doubled.”

    Market reaction: U.S. stocks
    DJIA,
    -0.59%

    SPX,
    -0.39%
    were down in early trading on Tuesday. The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.721%
    rose above 3.7%.

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  • Home builders turn bullish for the first time in nearly a year amid strong housing demand

    Home builders turn bullish for the first time in nearly a year amid strong housing demand

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    The numbers: For the first time in nearly a year, home builders are upbeat about the housing market outlook.

    The shortage of previously-owned sales is helping to buoy builders’ confidence. 

    With mortgage rates above 6%, many homeowners find little incentive to sell—nearly 92% have an outstanding mortgage with a rate below 6%, according to a recent survey conducted by Redfin
    RDFN,
    -0.37%    ,
    a brokerage and real estate listings company. And 23.5% of homeowners have a mortgage rate of less than 3%. Consequently, the number of new home listings has dropped by 22%, as compared with the same period a year ago, according to a Realtor.com housing trends report.

    In turn, home builders are feeling good about their business. The National Association of Home Builders’ (NAHB) monthly confidence index rose 5 points to 55 in June, the trade group said Monday.

    This is the sixth month in a row that sentiment has improved among builders. It is also the first time in 11 months that builder confidence has moved into positive territory of above 50.

    The June reading of 55 was the strongest since July 2022. A year ago, the index stood at 67.

    Key details: Builders were starting to pull back on sales incentives. The share of builders cutting prices to boost sales has dropped to 25% in June, from a peak of 36% in November 2022.

    The typical builder was cutting prices by 7% in June, the NAHB said.

    The three gauges that underpin the overall builder-confidence index were up.

    • A reading on current sales conditions rose by 5 points. 

    • A measure on future sales gained 6 points.

    • A gauge of traffic of prospective buyers rose by 4 points. 

    Big picture: Due to pandemic-era monetary policies that depressed mortgage rates, the home buyers, real-estate agents, mortgage brokers and the rest of the industry are stuck trying to find solutions to a major supply crunch of homes.

    Builders seem to be one of the few participants who have benefited from the supply crunch, given the nature of their business of new construction. The homebuilder ETF,
    XHB,
    -0.38%    ,
    is up 25% year-to-date. 

    What the NAHB said: “A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” Robert Dietz, chief economist at the NAHB, wrote.

    And with the “Federal Reserve nearing the end of its tightening cycle,” the statement read, it’s “good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans.”

    Markets were closed on Monday in observance of the Juneteenth holiday.

    Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, also a subsidiary of News Corp.

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  • The Fed’s ongoing housing market ‘reset’ sees buyer cancellation rate at one of the nation’s largest homebuilders spike to 68%

    The Fed’s ongoing housing market ‘reset’ sees buyer cancellation rate at one of the nation’s largest homebuilders spike to 68%

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    “When I say reset, I’m not looking at a particular specific set of data. What I’m really saying is that we’ve had a time of a red-hot housing market all over the country, where famously houses were selling to the first buyer at 10% above the ask even before seeing the house… For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again. We probably in the housing market have to go through a correction to get back to that place,” Powell said. “But from a business cycle standpoint, this difficult [housing] correction should put the housing market back into better balance.”

    Of course, this so-called “difficult [housing] correction” has already arrived. Look no further than the latest earnings report by KB Home, one of the nation’s largest publicly traded homebuilders.

    On Wednesday, KB Home announced that its buyer cancellation rate in the fourth quarter of 2022 spiked to 68%. That’s up from 35% in the third quarter of 2022, and up from 13% in the fourth quarter of 2021.

    “Current conditions remain challenging. High mortgage rates and persistent inflation, together with an uncertain economy, have made homebuyers more cautious since the middle of last year. As such, in the fourth quarter, we prioritized delivering our large backlog and protecting our high margins over taking steps to stimulate additional sales during this seasonally slower time frame,” KB Home told investors on Wednesday.

    Historically speaking, a 68% cancellation rate is off the charts. Even during the darkest days of the 2008 era crash, the average builder cancellation rate only reached 47%.

    What’s going on? Pressurized affordability—a 3 percentage point mortgage rate jump following a +40% run-up in U.S. home prices—has sent a shock wave through the U.S. housing market. Some buyers are cancelling their contracts because they’re afraid that home prices will fall further in 2023; others have simply lost their mortgage eligibility in the face of 6% mortgage rates.

    Spiking cancellation rates puts homebuilders in a pickle. The problem: builders still have a tremendous amount of inventory—both single-family and multi-family—in the pipeline. The pandemic housing demand boom coupled with supply chain issues pushed the number of U.S. housing units under construction to a record high in 2022.

    Heading forward, builders will continue to turn to their housing downturn playbook to unwind that unsold inventory. They’ll start by offering incentives like mortgage rate buydowns, and if that doesn’t work, then begin to mark down home prices until their unsold inventory has been moved.

    “Depending on market dynamics and backlog levels in each community, we are getting more aggressive with our pricing ahead of the spring selling season, in order to generate new orders. At the same time, with the industry-wide deceleration in housing starts compared to a year ago, we are also pursuing reductions in direct construction costs and build times, which should help to offset the impact of pricing adjustments we may take,” KB Home told investors on Wednesday.

    When it comes to cutting home prices, KB Home is treading lightly. If word gets out, buyers already under contract could get frustrated and cancel their contracts. That reason, coupled with wanting to protect their “comps”, is why builders prefer to offer incentives like mortgage rate buydowns rather than cut prices too much.

    Real estate agents and builders alike are rooting for a loosening of financial conditions, and a subsequent drop in mortgage rates.

    If mortgage rates fall on, say, favorable news on the inflation front, then affordability could gradually return to the market. Otherwise, as long as affordability remains “pressurized,” the U.S. housing market will likely remain in “reset” mode.

    Researchers at firms like Goldman Sachs and Moody’s Analytics aren’t as optimistic when it comes to mortgage rates. Both firms expect mortgage rates to hover around 6% this year, and both firms expect U.S. home prices to continue to fall through 2024.

    While the Fed’s housing “reset” certainly has builders reeling, it’s hardly a doomsday for them. Just look at the stock market.

    While major homebuilders are all down from their 2022 highs, they’re still well above their January 2020 share price. That includes builders like D.R. Horton (+78% since January 1, 2020 ), Lennar (+73%), Toll Brothers (+34.5%), NVR (+29.3%), PulteGroup (+25.2%), and KB Home (+1%).

    Bank of America researchers think the bottom in homebuilder stocks could be in the rearview mirror.

    “Homebuilder stocks underperformed in 2022 as mortgage rates spiked to 7% from 3% and demand deteriorated in the second half of the year. In 2023, we are cautious on housing demand…but we see a more favorable setup for homebuilder stock performance for a few reasons: 1. Homebuilder valuations are already pricing in weak demand and home price depreciation. 2. Mortgage rates have declined from peak levels and are poised to move lower in 2023. 3. We do not see material risk to book value – most of the land on balance sheets was purchased prior to 2021 and we expect a home price correction (down 10%) rather than a crash (down 15-20%). 4. Builder margins will benefit from lower input costs (estimate 200-300 basis points tailwind from lumber),” Bank of America researchers wrote on Wednesday.

    Bank of America reiterates a neutral rating for KB Home.

    “We expect [KB Home] orders to remain under pressure with rising mortgage rates, but headwinds are likely already reflected in valuation with shares trading,” wrote Bank of America researchers. “In addition, we believe KBH has some cushion to its margins even as pricing declines given 40% [of] its owned lots were contracted in 2019 and another 40% were contracted in 2020, prior to the run-up in land prices. Still, we believe KBH has the highest risk of write-downs across our coverage given its high exposure to underperforming West Coast [and] Mountain [West] markets.”

    Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

    Learn how to navigate and strengthen trust in your business with The Trust Factor, a weekly newsletter examining what leaders need to succeed. Sign up here.

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    Lance Lambert

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  • Builder sentiment fell every single month in 2022. Builders say there’s a silver lining.

    Builder sentiment fell every single month in 2022. Builders say there’s a silver lining.

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    The numbers:  The National Association of Home Builders’ monthly confidence index fell two points to 31 in December, the trade group said on Monday.

    It’s the 12th month in a row that the index has fallen.

    Outside of the pandemic, the December reading of 31 is the lowest level since mid-2012.

    A year ago, the NAHB index stood at 84. The index’s 12-month drop is a new record. 

    But it’s not the biggest drop, the NAHB said. The drop in builder confidence between the end of 2004 and the start of 2009 was sharper; the index fell from 71 to 8 in that span.

    Key details: The three gauges that underpin the overall confidence index were mixed:

    • The gauge that marks current sales conditions fell by 3 points. 

    • The component that assesses sales expectations for the next six months rose by 4 points.

    • And the gauge that measures traffic of prospective buyers was unchanged from last month.

    All four NAHB regions posted a drop in builder confidence, led by the South and the Northeast. 

    Big picture: While builders continue to struggle to find buyers with the current rate environment, they’re also seeing a light at the end of the tunnel.

    Buyers are slowly coming back to the table as mortgage rates are no longer above 7%, and home price growth is moderating.

    And with 62% of builders offering incentives like mortgage rate buy-downs, paying points for buyers, and even price reductions, that luring some buyers, per the NAHB.

    About 35% of builders were dropping home prices in December, the NAHB said, with the average price reduction being 8%.

    What the NAHB said: “The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment,” Robert Dietz, chief economist at the NAHB, said in a statement.

    “Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations,” he added.

    But the NAHB is expecting “weaker housing conditions” to persist in 2023, and only forecasts a full recovery in 2024, Dietz said. There is still a gap of 1.5 million housing units, they estimated nationwide.

    Nonetheless, the path to recovery is hard, the builders stressed.

    “In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers,” Jerry Konter, chairman of the NAHB and a home builder and developer from Savannah, Ga., said in a statement.

    “With construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices,” Konter added.

    What are they saying? “We think home sales will find a floor by the end of the first quarter, helped by the near-75 [basis point] decline in mortgage rates since late October,” Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, wrote in a note.

    “But a meaningful recovery is still a long way off, and home prices have much further to fall,” he added.

    Market reaction: The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.597%
    rose to 3.57% on Monday morning.

    While the SPDR S&P Homebuilders ETF
    XHB,
    -1.67%
    traded slightly lower during the morning session, as well as big home builder stocks like D.R. Horton Inc
    DHI,
    -1.44%    ,
    Toll Brothers
    TOL,
    -0.87%    ,
    and Lennar
    LEN,
    -2.28%    .

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  • Home builders sentiment index falls for record tenth month in a row in October. Home builders say the ‘situation is unhealthy and unsustainable.’

    Home builders sentiment index falls for record tenth month in a row in October. Home builders say the ‘situation is unhealthy and unsustainable.’

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    The numbers:  The National Association of Home Builders’ (NAHB) monthly confidence fell 8 points to 38 in October, the trade group said on Tuesday.

    It’s the tenth month in a row that the index has fallen.

    Outside of the pandemic, the October reading of 38 is the lowest level since August 2012.

    A year ago, the index stood at 80.

    The index’s ten-month drop is a new record. The index last fell for 8 months straight in 2006 and 2007.

    Key details: All three gauges that underpin the overall builder-confidence index fell.

    • The gauge that marks current sales conditions fell by 9 points. 

    • The component that assesses sales expectations for the next six months fell by 11 points.

    • And the gauge that measures traffic of prospective buyers fell by 6 points.

    All four NAHB regions posted a drop in builder confidence, led by the south and the west. 

    It’s also likely that this year will be the first time since 2011 that single-family starts see a decline, the NAHB added.

    Big picture: Builders continue to struggle to find buyers with the current rate environment.

    Now they’re saying they’re worried about that depressed demand impacting supply moving forward.

    Specifically, they’re concerned about housing affordability worsening, with potentially fewer new homes being built in the future.

    Mortgage rates have doubled from last year, now exceeding 7%, which has considerably cooled buyer demand. 

    Home price growth is moderating, but prices have not come down substantially — yet. 

    The median sales price for a new home was $436,800 in August, according to the U.S. Census Bureau.

    What the NAHB said: Builders are expecting single-family starts to fall for the first time in 11 years — and expect additional declines through 2023, said NAHB Chief Economist Robert Dietz, due to the Federal Reserve’s projected rate hikes to control inflation.

    “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,” he added.

    “This situation is unhealthy and unsustainable,” Jerry Konter, a home builder and developer from Savannah, Ga. and the NAHB’s chairman, said in a statement.
    “Policymakers must address this worsening housing affordability crisis,” he added.

    What are they saying? “The housing sector – sentiment, building activity and sales – is collapsing under the weight of a rapid increase in interest rates and elevated prices, which are crimping affordability and demand,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a note.

    So expect building activity to be depressed, she added.

    Market reaction: The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.989%
    fell to 3.98% on Tuesday morning.

    While the SPDR S&P Homebuilders ETF
    XHB,
    +2.15%
    traded slightly higher during the morning session, and the big home-builder stocks, from D.R. Horton Inc.
    DHI,
    +2.90%
    to Toll Brothers
    TOL,
    +1.87%
    to Lennar
    LEN,
    +2.97%    ,
    edged higher.

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