Financial stability concerns weigh on improved builder confidence: NAHB/Wells Fargo

In the latest release of the National Association of Home Builders (NAHB)/ Wells Fargo report, the US Housing Market Index (HMI) outperformed expectations rising to 44.0 in March, as against consensus estimates of 40.0.

 This marked the third consecutive improvement after a sustained decline through 2022.

As a measure of builder sentiment in the single-family homes market, a sub-50 reading suggests that most respondents viewed market conditions unfavourably.

While registering the eighth consecutive below-50 print, the index was 44.3% lower on an annual basis.

Although overall confidence saw an uptick driven by pent-up demand, a key factor weighing on sentiment is the health of the banking system. Interested readers can view commentary regarding the main drivers influencing US regional banks in this article.

High and volatile mortgage rates, tight monetary conditions, elevated construction inflation and a CPI of 6.0% also exerted downward pressure on the broader outlook.

The elevated demand in the system is partly a response to chronic underinvestment in housing stock and the low availability of inventories.

Even so, the uptrend is promising since the HMI has historically been a reliable indicator of future housing starts.

Index constituents

The HMI consists of three sub-components, i.e., current sales conditions, six-month ahead sales expectations, and prospective buyer traffic.

Current sales and buyer traffic headed higher by 2 points and 3 points in March, settling at 49 and 31, respectively.

Sales expectations, on the other hand, fell by a single point to 47, pressured by the Fed’s hawkish narrative and expectations of elevated rates throughout 2023.

Builders remain cautiously optimistic; however, the traffic of prospective buyers is deeply subdued which continues to be a drag on sales projections.

Regional HMI

The three-month average of the HMI improved across each category, rising by 5 points to 42 and 45 in both the Northeast and South, respectively; and shifting higher by 1 point and 4 points to 34 in both the Midwest and West, respectively.

Outlook

Given rising concerns that bank runs may drive more cases of insolvency and bankruptcy, both buyers and builders are maintaining a wait-and-watch stance.

The potential fragility of the banking system may lead the Fed to loosen monetary policy in its upcoming meeting.

Theoretically, such a scenario should boost aggregate buying intention, which remains suppressed due to prevailing unaffordability.

Secondly, although inflation does appear to be easing, it remains historically elevated and is reducing very gradually.

This could continue to dissuade buyers across the single-family market in the coming months.

However, Peter Schiff, Chief Economist and Global Strategist at Euro-Pacific Capital, warns that an early Fed pivot may provoke a resurgence in inflation, preventing purchases and complicating the low supply picture. A piece discussing his views is available here.

On the contrary, if the Fed were to continue its tightening agenda, Robert Dietz, the Chief Economist at the NAHB expects this to have a detrimental impact on new construction projects and exacerbate the housing recession, noting,

…further constraints for acquisition, development and construction (AD&C) loans for builders across the nation…(will be a) hurdle to housing affordability.

Thus, the near and medium-term market outlook on single-family homes remains uncertain with a downward bias, while industry watchers will look to re-assess their positions once the Fed’s next steps become clearer.