Homebuilders Sentiment Free Fall

Although material cost pressures have shown some signs of alleviating (for example lumber and copper futures have been grinding lower), the cost to finance a home has only increased with the national average of a 30-year fixed-rate mortgage hovering around 5.5%. That higher cost dampens demand, and homebuilder sentiment has taken a sharp turn lower.  The NAHB’s Housing Market Index fell from a top 5% reading of 77 last month all the way down to a new 52-week low of 69 this month. The index has been rolling over for some time now after peaking all the way back in November 2020, and the 8 point month over month decline in May is the worst of that span, ranking as the fourth largest monthly decline in the history of the index. Two of those larger declines came in the midst of recessions/major economic shocks—October 2001 (9/11) and April 2020 (start of the pandemic).  The other largest drop was in February 2014.

NAHB Housing Market Index

The big drop in the headline index points to a notable deterioration in reported conditions and similar drops were shared across the sub-indices. Present sales remain the most elevated with its reading of 78 managing to stay in the top decile of its historical range, but just barely so as the 8-point m/m decline also ranks as one of the largest on record. Even though reported sales are holding up decently (albeit far from improving), sentiment for future sales has collapsed.  After a double-digit decline this month, the index is below its historical median meaning homebuilders are anticipating activity to slowdown in the coming months. One likely reason is that overall traffic has pulled back sharply. The 9-point month-over-month drop is tied for the second-largest decline on record.

Homebuilders Sentiment

From a geographic standpoint, this month was interesting.  As with the national indices, the Midwest and West saw some of the sharpest activity pullbacks in the history of the survey.  Those indices are now around similar levels to the spring of 2020. For the South, the decline did not result in an outright collapse below the post-pandemic range, but nonetheless, the decline was enormous by historic standards.

Then there’s the Northeast. While the rest of the country experienced sharp pullbacks, the Northeast index actually rose by 2 points to 76.  Although the level remains middling versus its post-pandemic range, it is a notable divergence compared to the rest of the country.

Housing Market

In spite of the report on homebuilder sentiment, homebuilder stocks, as proxied by the iShares US Home Construction ETF (ITB), are actually higher alongside the rest of the market, currently up 1.3%.  Those gains on top of the past few days’ rally appear more technical in nature than any sort of improvement in the overall backdrop for the space.  As shown below, the group has been hit hard this year as mortgage rates have soared. Hardly at any point this year has the group managed to trade above its moving averages.  Click here to learn more about Bespoke’s premium stock market research service.

Homebuilders Performance

Western Wobbling in Homebuilder Sentiment

As the national average for a 30-year fixed rate mortgage has risen to and remained above 5%, homebuilder sentiment has been reversing its pandemic gains.  The NAHB’s monthly homebuilder sentiment index dropped 2 points in April to 77.  That was the fourth decline in a row bringing the headline number to the weakest reading since September of last year.  That is also now only one point above the December 2019 pre-pandemic high.

Housing Market Index

The decline this month was mostly driven by a decrease in traffic. That index dropped 6 points to 66 which is the weakest level and the biggest one-month decline since last August.  Meanwhile, present sales dropped 2 points for the second month in a row. On the bright side, future sales actually ticked up 3 points to snap a three-month losing streak.  That being said, the current level of this index is much less elevated within its historical range compared to the others.

NAHB Housing Market Index

Geographically, there are some large divergences in homebuilder sentiment.  For starters, the Northeast showed the most impressive improvement with the index rising 9 points month over month.  Whereas last month it was the lowest within its respective historical range, today it is the most elevated.  The South also saw an improvement as this region has perhaps been the most stable across the pandemic years. The West and Midwest were other stories entirely in April.  The Midwest experienced its second-largest decline on record behind the 42 point drop in April 2020 and is now at the lowest level since June 2020.  Meanwhile, the West fell 7 points. That also was the biggest drop in two years though the index saw an even lower reading as recently as last September.

Housing Market Sentiment

As homebuilder sentiment drops, so too have homebuilder stocks.  The iShares US Home Construction ETF (ITB) — which tracks the space — has been falling sharply since peaking around the turn of the year.  Click here to view Bespoke’s premium membership options.

US Home Construction ETF (ITB)