Homebuilder Confidence Hits 2-Year Low: Rising Costs Pinch

The National Association of Home Builders’ (NAHB) monthly index of builder sentiment fell 8 points to 60 in November, hitting it lowest level in more than two years. Affordability concerns have been contributing to the declining homebuilder sentiment for quite some time now.

Homebuilders have been complaining of rising raw materials costs, a tight labor market and higher mortgage rates. Moreover, home prices have increased at a faster rate than wages, making them expensive. Also, higher lumber prices owing to import tariffs have been hurting homebuilders’ margins.

Homebuilder Confidence Hits Lowest Level in More Than 2 Years

Homebuilder confidence declined 8 points to 60 in November, per the National Association of Home Builders/Wells Fargo Housing Market Index. This is the lowest level since the 59 recorded in August 2016. The index stood at 69 last November.

Also, the eight-point decline is the biggest monthly fall since a 10-point drop recorded in February 2014. Of the three components in the index, buyer traffic, dropped 8 points to 45, while current sales conditions declined 7 points to 67 and sales expectations for the next six months fell 10 points to 65.

Understandably, sentiments of builders continue to dip on affordability concerns owing to rising mortgage rates and continued home price growth. This has led to an increasing number of younger homebuyers finding it extremely difficult to afford homes.

Price Performance of Major Homebuilders in the Last 3-Month Period

The housing market in the United States has been suffering for a while now despite robust economic growth. Shares of major homebuilders have been taking a hit. Over the past three months, shares of William Lyon Homes WLH, KB Home KBH, D.R. Horton, Inc DHI, Lennar Corporation LEN and Toll Brothers, Inc. TOL have declined 44.1%, 25%, 25.1%, 22.9% and 23.1%, respectively. Each of the above stocks carries a Zack Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Affordability Concerns Weigh on Homebuilders

Although any reading above 50 is believed to be positive, the housing market has been softening for months now owing to the rising prices of construction materials, shortage of skilled labor and higher mortgage rates. Higher wages, steady income and more jobs definitely hint at a robust U.S. economy. However, higher mortgage rates have pushed up prices of homes.

U.S. mortgage remained flat this week, maintaining the seven-year high point, per Freddie Mac. The 30-year fixed mortgage averaged 4.94% for the week ending Nov 15, the same as the previous week.

Also, expectations of future rate hikes have made homebuilders take a more cautious approach, which has been denting homebuilder sentiment further. Moreover, higher raw material costs and shortage of skilled labor have not only escalated prices of new homes but also have slowed the pace of the housing market’s growth.

Adding to the woes is increased lumber prices owing to an import tariff, which is affecting homebuilders' margins. This sluggishness in the market has resulted in a number of homebuilders like KB Home and Lennar lowering their sales guidance for the fourth quarter.

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D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
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