Rates Hit Homebuilders

Oct 17, 2023

Among industrial production and retail sales, the other major economic release this morning was homebuilder sentiment from the NAHB.  As shown below, the October report showed sentiment slid down to a new multi-month low of 40. That was a four point decline month over month on top of the September reading being revised one point lower to 44.  That marks the third MoM decline in a row since sentiment peaked at 56 in July.  That leaves the index 9 points above the post-pandemic low of 31 from last December.

The drop in the headline index was due to broad-based weakness throughout the report.  As shown below, every component of the headline number was lower month over month and is now in the bottom quartile of historical readings. Those month-over-month declines in October were also historically large, each one with the exception of future sales ranking in the bottom decile of all month-over-month moves. That would imply the nation’s homebuilders have seen significant deterioration in their businesses which the NAHB noted was on account of higher rates.

As for a regional look at homebuilder sentiment, each area also saw a lower reading month over month, however, there is a degree of variability in these readings. For starters, homebuilder sentiment in the Northeast is by far the healthiest with the October reading registering in the 58th percentile of all months since 2005.  That compares to the next highest, the Midwest, which is only in the 38th percentile.  Like the Northeast, the Midwest only fell by a single index point month over month, and that was dwarfed by the 7-point decline in the West and a 5-point decline in the South.

In addition to today’s homebuilder sentiment data, one week ago the NAHB also published its quarterly survey on the remodeling market.  Here too there has been a significant deterioration in conditions on account of higher interest rates.  While the headline index remains bolstered and sits above the pre-pandemic range, it has pulled back significantly and is at the lowest levels since Q1 2020.  Future market conditions, however, are back in line with pre-pandemic readings. Remodelers are also reporting new post-pandemic lows of smaller backlogs and fewer appointments for proposals. This trend was also reflected somewhat in the September Retail Sales report where housing-related sectors have seen some of the largest year-year declines in sales.

In addition to homebuilder sentiment having taken a hit, homebuilder stocks have also pulled back. Since the high at the start of August, the iShares Home Construction ETF (ITB) has fallen 13.9% having recently found support at its 200-DMA.  While the group has found support, the past couple of months’ downtrend remains firmly in place.