Home builder sentiment takes another hit as new-home sales dip

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Mortgage volumes for purchases of newly constructed homes reversed course in September, falling due to increased economic worries, which also helped drive home builder confidence down to its lowest point in more than 10 years. 

New-home mortgage applications fell an unadjusted 13.2% on an annual basis, according to data from the Mortgage Bankers Association's Builder Application Survey. The monthly total also reflected a 7% drop from August following a short-lived spike. Volumes in August had fallen by a smaller margin of 10.1% year over year, but increased by 17% on a monthly basis for the first time since March.

"New-home purchase activity declined in September, as prospective homebuyers pulled back in response to higher mortgage rates, increased concern about an impending recession and a broader slowdown in home-price growth," said Joel Kan, MBA's vice president and deputy chief economist, in a press release. 

"The average 30-year fixed mortgage rate increased almost a full percentage point in the last month, greatly reducing the purchasing power of many home shoppers," Kan said.

With September's drop in applications, the MBA revised its projected seasonally adjusted rate of annual new single-family home sales downward by 8.9% to 637,000 units from 699,000 a month earlier when mortgage rates briefly declined. MBA's estimated sales rates had risen 18.3% in August. 

Adding to the headwinds faced by lenders and builders in September was the announcement of another 75-basis-point hike in short-term rates, a move met with consternation among many in the industry. Research from several organizations also showed a clear trend of home-price deceleration after record highs earlier this year. 

The cumulative effect of slowing sales and surging interest rates this year continues to take a toll on homebuilders' outlook. Data from the National Association of Home Builder/Wells Fargo Housing Market Index released on Tuesday showed industry confidence falling for the 10th month in a row. The index came in at 38 on a 100-point scale, its lowest reading since August 2012, with the exception of two disrupted months at the onset of the COVID-19 pandemic. A month ago, NAHB's index registered a score of 46, while one year ago, it was up at 80. 

A number over 50 indicates more builders surveyed view conditions as good, rather than poor. All three components of the index — current sales conditions, sales expectations and prospective-buyer traffic — scored less than 50 in September. 

Few bright spots appear on the horizon for homebuilders either should interest rates remain at current levels, NAHB said.

"This will be the first year since 2011 to see a decline for single-family starts," said NAHB Chief Economist Robert Dietz in a research statement. "And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues." 

The MBA said sales of new single-family constructions totaled approximately 52,000 in September, a decrease of 10.3% from 58,000 in August. Conventional loans accounted for 69.8% of new-home applications, down from 72.1% in August. Among the remaining pool of government-backed loans, 18.7% came through the Federal Housing Administration, 11.2% from the Department of Veterans Affairs and 0.3% through the U.S. Department of Agriculture. Their August shares were 17%, 10.2% and 0.2%, respectively.

The slowdown in buyer interest has created a surplus of new homes, with price cuts likely needed to bring down supply, researchers at Fannie Mae recently said. Its prediction is backed by the latest MBA numbers, showing the average purchase-loan size of new homes decreasing 2.1% to $406,767 in September from $415,594 the month prior. The average has fallen for five consecutive months after hitting a record high of $436,576 in April.