According to the industry’s trade group, home builders can look forward to brighter days ahead. While the data may not reflect it just yet, economists predict that new-home construction will decrease in October.
Housing starts and permits, which are monthly government indicators of home construction activity, are expected to be released on Friday at 8:30 a.m. Both indicators are estimated to have declined due to the increased costs associated with home buying, which has put pressure on prospective buyers.
This year, buyers have been struggling with rising housing costs. In fact, one daily measure of the 30-year fixed rate mortgage reached its highest point in over two decades last month, scraping 8%. With mortgage rates on the rise and home prices outpacing incomes, the housing market hasn’t been this unaffordable since the mid-80s, as reported by ICE Mortgage Technology.
The increase in mortgage rates has adversely impacted both builders and buyers. The National Association of Home Builders’ monthly gauge that measures industry sentiment dropped to its lowest level since late 2022, as reported by the trade group on Thursday. Furthermore, the Mortgage Bankers Association stated that applications for home purchase loans earlier this year plummeted to the lowest level since 1995.
The Impact of Rising Interest Rates on Home Builders
The recent rise in interest rates has had a significant impact on the outlook of home builders. Many potential buyers have been priced out of the market, leading to a dampened view of market conditions. Alicia Huey, chairman of the trade group, expressed concern over higher short-term rates, which have created additional challenges for home builder financing.
Despite the overall pessimism among builders, there is hope for improvement in the coming months. Recent declines in the 10-year Treasury yield indicate a brighter future. Robert Dietz, the trade group’s chief economist, believes that improving macroeconomic data will contribute to better conditions for home construction. With a lack of existing home inventory, lower mortgage rates are expected to stimulate housing demand and potentially improve builder views by December.
Investors in home builders have taken note of these developments and bought shares in recent weeks. The decline in the 10-year Treasury yield, which often impacts mortgage rates, has fueled optimism. Freddie Mac’s measurements reveal a decline in mortgage rates to 7.44%, the lowest 30-year fixed rate since September. Home loan applications have increased as a result, although the index measuring purchase loan applications remains lower than at this time last year.
Despite these positive signs, exchange-traded funds tracking the home builders and related industries, such as the SPDR S&P Homebuilders ETF (ticker: XHB) and the iShares U.S. Home Construction ETF (ITB), are still trading below their record highs. This suggests that there is still some caution among investors.
In summary, the rise in interest rates has undoubtedly affected the home builders’ market. However, there is reason to believe that conditions will improve in the coming months due to declining mortgage rates and increasing housing demand. This may lead to a more positive outlook for builders towards the end of the year.