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What's Worrying Housing Industry Despite Low Mortgage Rates?

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Shrabana Mukherjee
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Confidence among homebuilders in the United States weakened in June as construction costs and labor concerns crept up. U.S. home builder confidence fell two points to 64 in June from the previous month, as measured by the National Association of Home Builders’ index. Notably, this is the first decline this year, indicating that lower mortgage rates are failing to give the housing market a sustained boost.

Precisely, all three Housing Market Index components fell marginally in June. The index gauging current sales conditions fell one point to 71 points, while buyer traffic slipped from 49 to 48. Additionally, expectations for the next six months dropped from 72 to 70 points.

“While demand for single-family homes remains sound, builders continue to report rising development and construction costs, with some additional concerns over trade issues,” NAHB Chairman Greg Ugalde said.

Mortgage rates have been declining since November 2018, and hit the lowest level in two years this month, which should have provided a major boost to the rate-sensitive housing market. Last week, interest rates on U.S. 30-year, fixed-rate mortgages remained at 3.82%, their lowest levels since September 2017, Freddie Mac said. Then again, homebuilders are complaining about the dearth of affordable, entry-level homes in the market.


Rising Costs: A Major Impediment

Builders remain perturbed by rising development and construction costs, and trade issues. Although new home sales advanced in March and April, builders continue to worry about excessive regulations, a shortage of lots and lack of skilled labor that are hurting affordability.

Given the scenario, elevated home prices posed a major challenge to entry-level buyers considering the income level. Peter Boockvar, chief investment officer at Bleakley Advisory Group, noted that lower mortgage rates have not been enough “to offset years of 5-6% home price gains in enticing first-time buyers to buy instead of rent.”

Home values in the United States have increased 6.1% over the past year and Zillow expects it to increase 2.8% in another year.

Is Housing on Shaky Ground?

Stocks in the homebuilding industry have outperformed the broader market year to date. The SPDR S&P Homebuilders ETF XHB has risen 29.2% in 2019 compared with 14% gain in the S&P 500. Shares of leading homebuilders such as PulteGroup PHM, KB Home KBH, D.R. Horton Inc. DHI and Lennar LEN have surged 25.7%, 37.2%, 32.6% and 35.4%, respectively, so far this year.

Improving economic conditions, rising disposable income and favorable demographic changes are continuing to support demand.

According to Freddie Mac’s June forecast, although house price is expected to grow 3.6% in 2019, home sales could reverse the 2018 slump and come in stronger at 6.03 million this year and increase to 6.19 million in 2020.

Meanwhile, new data on May housing starts and building permits — scheduled to be released on Jun 18 by the U.S. Census Bureau and Department of Housing and Urban Development — will throw light on the housing market.

The U.S. new-home construction is expected to rise for the third consecutive month in May. Housing starts registered 5.7% gain in April. Permits, which precede future construction, are also expected to increase 0.1% to a 1.297 million annualized rate.

Despite June’s drop in builder confidence, we are hopeful about the industry given solid housing demand (mainly for single-family construction), upbeat economic growth and continued job creation. Builders remain equally hopeful for the upcoming months given solid demand. Notably, the index remained within a band of low to mid-60s over the past five months. It is to be noted that any reading above 50 indicates that more builders expect sales conditions to be good rather than poor.

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