Housing bubble prepares to burst: Traffic from potential new home buyers plunges, homebuilders cut prices, sentiment plunges


Homebuilder stocks have fallen all year, now between 24% and 40%.

By Wolf Richter for WOLF STREET.

Homebuilders have struggled for more than a year with supply and labor shortages and ridiculously high costs. Also this year, new Holy-Moly mortgage rates added to the woes, and unsold inventory rose to levels not seen since 2008, as sales fell. And homebuilder stocks have been hammered across the board, down year-to-date between 24% and 40%.

So, unsurprisingly, single-family homebuilder confidence, as shown by the NAHB/Wells Fargo Housing Market Index for July, released today, plunged 12 points, the second biggest drop in data dating back to 35 years. , behind only the April 2020 cliff plunge, as “high inflation and rising interest rates have stalled the housing market by significantly slowing sales and buyer traffic,” the NAHB said.

This is the seventh consecutive month-over-month decline. In other words, it’s all been downhill so far this year. With today’s index value of 55, it is now back to where it was in May 2015. And it is back to where it was in February 2006, although it was falling much more slowly at the time.

“Production bottlenecks, rising home construction costs and high inflation are causing many builders to halt construction as the cost of land, construction and financing exceeds the market value of the home” , said the NAHB.

And manufacturers are lowering prices: 13% of builders reacted to these conditions by reducing home prices in the past month to stimulate sales “and/or limit cancellations”, according to the report.

At regional levelthe housing market index plunged the most in the West (-16 points) and South (-15 points), with the West and Midwest posting the worst HMI levels of 48 and 49 respectively.

Region HMI, July Change of point fr. last month
Northeast 57 -5
Midwest 49 -6
South 60 -15
West 48 -16

The future looks worse, homebuilders said.

There are three components to the MHI: current sales, sales prospects for the next six months, and traffic from potential buyers. Only the current sales component was still at a positive level.

The current sales index plunged 12 points in July, to a value of 64, meaning even more builders are rating current sales as “good” rather than “bad” (an index value of 50 would be neutral).

The sales index over the next six months plunged 11 points to an index value of 50, meaning builders were evenly split between those who rated their future sales as “good” and those who rated them as “poor”.

And the traffic index of potential buyers has plunged by 11 points, to an index value of 37, after having already fallen below the 50 mark in June. Traffic is an indication of buyer interest, and buyers have lost interest. This is a real problem for the future.

For this component, builders were asked to rate potential buyer traffic as “high to very high”, “medium” or “low to very low”. Today’s index value of 37 means more builders rated the market ‘low to very low’ rather than ‘high to very high’, the second month in a row with a reading below 50:

Homebuilder stocks have faltered all year, interrupted by strong bear market gains as bearish buyers piled in, only to be crushed by more selling shortly thereafter. The last rally that started in mid-June seems to have run its course now (data via Ycharts):

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