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Homebuilder Sentiment Drops Along With Housing Prices

Key takeaways

  • Homebuilder sentiment, measured by the National Association of Homebuilders, fell in October.
  • The report indicates that homebuilder sentiment has fallen for 10 consecutive months.
  • The housing market faces multiple challenges, including relatively high mortgage rates and inflationary pressures on household budgets.

If you’ve been paying attention to the housing market, you’ve probably noticed the relatively bumpy ride it’s had over the past few years. After rock-bottom mortgage rates contributed to seemingly endless bidding wars through 2020 and 2021, the bullish market has cooled in recent months.

The latest homebuilder sentiment report reflects a slower housing market. Let’s take a closer look at the highlights of changing homebuilder sentiment and falling home prices.

Homebuilder sentiment falls

The National Association of Home Builders (NAHB) takes the temperature of home builder sentiment on a monthly basis. In the latest report, homebuilder sentiment fell again. Confidence was reflected at 38 in October, meaning it is at half the level it was 6 months ago.

This represents 10 consecutive months of declining homebuilder sentiment. With the exception of the uncertain times of spring 2020, this confidence reading is the lowest it has been since August 2012.

“This will be the first year since 2011 to see a decline in single family,” NAHB Chief Economist Robert Deitz said in a press release. “Given expectations for continued increased interest rates due to actions by the Federal Reserve, 2023 additional single-family construction is forecast to decline as the housing contraction continues.”

As of November, Redfin reported the national median home sale price at $397,549. This is an increase of 4.9% year-on-year. While this may seem like a sharp climb, house price growth has actually slowed down quite a bit.

Housebuilders are not the only ones warning against a possible drop in house prices. Some economists predict a sharp decline. The Federal Reserve warns that home prices could fall, but it doesn’t expect anything like the memorable collapse of the housing market that occurred during the Great Recession.

Potential reasons for changes in the housing market

With homebuilder sentiment dropping like a rock, it’s helpful to understand what factors are at play. There are many factors that contribute to a changing housing market. Here’s a closer look at the reasons that stand out.

Hot inflation

In recent months, inflation has been a main feature of the economy.

The Consumer Price Index (CPI), a popular measure of inflation, stood at a year-on-year increase of 7.7% in the October 2022 report. Although this reflects a gradual decline from the peak earlier in the year, we still live in highly inflationary times.

But you probably don’t need to look at a special report to know that inflation is present in a big way. You’ve probably noticed inflation as it affects your household budget. Individuals and families across the country are being forced to spend more on basics like food and electricity.

With this pressure on household budgets, it is difficult for many prospective homeowners to raise the funds needed for a down payment on a home. Additionally, the increased costs in other areas of their budget may make it impossible to take out an expensive monthly mortgage payment.

Rising interest rates

In response to sky-high inflation, the Federal Reserve aggressively tackled the problem. Although the central bank prefers to have some inflation in the economy, the current inflation rate is well above the 2% target.

The Federal Reserve raises the federal funds rate when it wants to tame inflation. Throughout 2022, the Fed has introduced a series of rate hikes. As the federal funds rate increases, so do the borrowing costs for homeowners.

Mortgage interest rates reached a 2022 peak of 7.08% for a 30-year fixed-rate mortgage. Since then, mortgage rates have fallen a bit. As of November 18, mortgage interest rates are down to 6.61%. But regardless of this small tumble, mortgage rates are still significantly higher than this time last year when the average interest rate on a 30-year fixed rate mortgage was 3.10%.

Higher mortgage interest rates lead to higher monthly payments for borrowers. The National Association of Realtors reported that the average monthly payment for a home buyer in the third quarter of 2022 was $1,840. This is significantly higher than the average of $1,226 in the third quarter of 2021.

Higher mortgage costs often mean that buyers cannot afford such a high sale price. With this factor in play, the possibility of falling house prices seems to make sense as prospective home buyers are priced out of the market.

How it affects your investment portfolio

The housing market is not the only sector of the economy affected by a combination of hot inflation and rising interest rates. As the real estate market moves around us, you may be interested in adding exposure to this asset class to your portfolio. But you may not be interested in monitoring the ins and outs of the up-and-down housing market trend.

One way to add exposure to real estate trends is by harnessing the power of artificial intelligence through a Q.ai Investment Kit. For example, the Global Trends kit takes real estate into account when making trades that align with your portfolio goals. Consider using this new style of investment technology today.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we will add an additional $100 to your account.

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