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Morning Brief: Homebuilder confidence hits a 13-month low in July

Myles Udland breaks down Wednesday’s Morning Brief, which details the factors contributing to a decline in homebuilder confidence outlined in the NAHB/Wells Fargo Housing Market Index and how this decline supports evidence that the COVID-era housing boom could be calming down.

Video Transcript

JULIE HYMAN: In today's "Morning Brief," Myles Udland wrote about housing, and specifically, sort of trying to figure out, what is this housing cycle? Where are we in it? We did get a little bit more detail on the state of the housing market this morning when we got housing starts for last month, which fell by 7%. But building permits, which rose by about 2.6%, both of them, by the way, reversing what they had been doing the prior month.

So I don't know if you can draw any conclusions from that, Myles, but you were also looking at homebuilder sentiment and some commentary around housing and what all of that tells us about where we are.

MYLES UDLAND: Yeah, I mean, the housing market has clearly been slowing down for some time now. And you would expect it to, given the frenzy of home buying that we saw earlier this year. And we continue to see home prices going higher, and we'll get another check on that later this month with the Case Shiller data. But ultimately, what you are seeing and-or at least what some economists believe we're seeing, it's just a right-sizing of the US housing market.

Certainly, there has been a massive pull forward of demand from urban dwellers Julie, like you and myself who decided to flee to the suburbs and get a different perspective on life as a result of the pandemic, perhaps. Or perhaps, just because the timing was right and it was something that we had always thought about doing at some point in the future, but things came together such that this was the moment to go buy a home.

And now with the pace of sales coming down, you know, and looking at things like mortgage applications clearly coming in. There just is not the appetite today for home buying as there was several months ago. So we see some of this feeding into the data, and then obviously in homebuilder sentiment, you're dealing with not only a slower pace of sales, but you're also dealing with higher costs. And lumber was a big story that we talked about. The price of lumber has come down, I think, in excess of 70% from its peak. So there's certainly been a transitory element to the inflation on the lumber side.

But of course, there's a lot more that goes into homes. And the NHB mentioned this in yesterday's homebuilder confidence data, that there are supply side limitations holding back the market. You still have bathtubs and fixtures, siding stuck on boats waiting to get offloaded. They are stuck in containers. And then when they get onshore, then there's no truck to bring them to where they need to go, so on and so forth. The cost of land for home builders has gone up considerably.

And so all of these challenges in getting a new home built have really compounded, and they continue to be a big part of that story, you know, along with a buying market that again, hit a kind of mania of sorts in April and May and even into June but now has started to correct, if only because everyone who wanted to scramble to get a home scrambled to get a home. And now you have maybe more patient, or less cash-available buyers coming into the market.

You're not-- you don't have the kind of folks coming in who are ready to go 50 over ask and do it in half cash, whatever these crazy things that we all heard about happening in the spring, that that's just coming out of the market. And, you know, really, as Ian Shepherdson of Pantheon Macro said. You know, in his view, just everyone just kind of missed the mark on what was happening, right?

I think he says, you know, the bid to go from the city to the suburbs came in fast and it's over. And now we're back to a more normalized housing market, and everyone is still benchmarking themselves maybe to that May, June, April time period when it was a frenzy and thinking that this was going to be some permanently new state of affairs.

And the incoming data-- at least in Ian's view-- is just backing up the idea that that was indeed a one-off and now we can go about our lives and think about housing in a more sober and sort of deliberate way rather than it being some manic period for homebuyers.

BRIAN SOZZI: Yeah Myles, it really-- everything you wrote about in the newsletter, it's playing out. I think it had played out in Home Depot. It played out in Lowe's and their quarterly results. It's playing out in their outlooks. We're not seeing that same level of remodeling activity at the same pace it was last year.

And to your point, I think a lot of folks thought you would be remodeling your home every single day. You'd need an endless stream of plants, and that's not happening.

JULIE HYMAN: I don't know, it feels like I still got a lot of remodeling to do. But one other thing I would say about all of this is that even if things moderate, price might not moderate to the same degree, right? And so then there affordability questions that are going to come up, especially if rates start to rise and the economy starts to cool down.

We already had an affordability problem in the US when it came to housing, and access problem because of building restrictions in certain areas and whatnot. So that's something that I think is going to continue to be a problem, and might even be worse coming out of the pandemic.

MYLES UDLAND: Yeah, I mean, I'll just say this. Like, people say things like, oh, there's going to be an affordability problem when rates go up. That's why rates aren't going up. That's all.

JULIE HYMAN: Right.

MYLES UDLAND: I mean, we do this dance every-- like, we've been doing it for 10 years. Why would there be 4% on the 10-year and why would there be 6 and 1/2 on a 30-year? It's just not going to happen, given all kinds of structural things. So that's all I got on that one.

JULIE HYMAN: Well, and I guess the difference between, you know, I guess the difference between a 3% mortgage rate and a 4% mortgage rate, you know, it makes a difference. But we're not talking about a huge jump like we've had in past eras, for example.