This is why it’s essential to monitor builders’ forward-looking outlooks closely. As shown below, housing activity related to permits remains minimal, with single-family permits — crucial to the market — growing slowly.
A significant change has occurred in the past month: the builder’s sales outlook has declined sharply. The index dropped from 66 to 60, representing a decrease of 6 basis points. Historically, such a decline has served as a reliable indicator of upcoming shifts in the market cycle. We’ve recently seen fluctuations in this data due to changing interest rates. With mortgage rates approaching 6%, builders were gaining confidence in selling homes. Now that rates have gone above 7%, the forward-looking confidence indicator has declined.
From the Builders survey: “The component measuring sales expectations in the next six months fell six points to 60 because of the elevated interest rate environment.”
I aim to keep things straightforward: the housing starts data for 2024 marked the lowest level in five years. The number of newly completed new homes for sale has risen to 120,000. The total number of completed units reported in the housing starts report has recently declined. In August 2024, there were 1,763,000 completed starts, but this number has since decreased to 1,544,000.
As confidence in the market declines, mortgage rates exceeding 7% pose challenges for builders. However, in recent years, mortgage rates between 6% and 6.5% have been more effective in stimulating activity in the housing market. On Thursday, Fed Chris President Waller tried to talk down mortgage rates to try to make financial conditions less restrictive in housing because of this chart.
The Federal Reserve cannot afford another sector to experience job losses like it did with manufacturing in 2024 while maintaining an unemployment rate target of 4.3% or lower. I discussed this on the HousingWire Daily podcast today.
While rates in the 6-6.5% range are not as low as the 3.25% to 5% rates we experienced over the past decade, that range should still facilitate the construction of more homes.
