LIVE MARKETS-Down from the basement: Homebuilder sentiment sinks to lowest since June 2012

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DOWN FROM THE BASEMENT: HOMEBUILDER SENTIMENT SINKS TO LOWEST SINCE JUNE 2012

The mood among homebuilders has moved from morose to moribund this month.

The National Association of Home Builders' housing market index (HMI) USNAHB=ECI surprised to the downside by dropping 3 points to 29, its lowest level in 14-1/2 years.

Analysts expected a shallower, one-point drop.

Iran war-related energy price pressures have revived fears of protracted, heightened inflation, which in turn has driven borrowing costs into the stratosphere. The average 30-year fixed contract rate, which has been soaring well above 6% for more than four years, currently sits at 7.5%, the highest it's been since November 2023.

Add rising materials costs and geopolitical uncertainty into the mix, and it's understandable that the index continues to wallow south of 50, the dividing line between pessimism and optimism in the sector.

“Housing remains squeezed by supply-side constraints and significant affordability challenges,” writes Robert Dietz, NAHB's chief economist. “Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines. As a result, buyer traffic has fallen to its lowest level since April 2012."

The 30-year fixed mortgage rate has been coasting north of 6% since September 2022, according to data from the Mortgage Bankers Association. And with spiking energy prices and uncertainties related to the war on Iran, there's little to coax would-be homebuyers into the fray.

"Even though the supply of houses for sale is short, don’t look for a rapid recovery in homebuilding until inflation uncertainty is addressed, monetary policy uncertainty is removed, bond yields stop rising—taking mortgage rates up with them—and corrosive uncertainty about costs, tariffs and other policies is resolved," says Carl Weinberg, chief economist at High Frequency Economics.

But while NAHB data is current as indicators go, all economic data is backward-looking.

Housing stocks, on the other hand, reflect where investors expect the sector to be six months to a year in the future.

With that in mind, expectations align with the homebuilders.

While housing-related indexes — the S&P 1500 Homebuilding Index .SPCOMHOME and the PHLX Housing Sector Index .HGX — enjoyed a couple of months of outperformance earlier in the year, that advantage evaporated in March when the Iran war pushed interest rates higher, taking mortgage rates with them.

Since then, the indexes have fallen behind the herd.

Year to date, the SPCOMHOME and the HGX are now down 10.3% and 11.8%, respectively. During the same period, the broader S&P 500 .SPX is up about 12%.

(Stephen Culp)

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