Homebuilders face headwinds on multiple fronts

The impact of inflation and interest-rate movements is leaving its mark on homebuilders, sending both industry sentiment and mortgage volumes of newly constructed homes down to their lowest point in over two years.

New-home applications in June fell 10% on a monthly basis and 12% year over year, according to the Mortgage Bankers Association Builder Application Survey, a measure of loan activity based on data collected from lending subsidiaries of U.S. homebuilders. Numbers were not seasonally adjusted. 

“Higher mortgage rates and heightened economic uncertainty cooled borrower demand in June, leading to new-home purchase applications declining to the lowest level since April 2020,” Joel Kan, the MBA’s associate vice president of economic and industry forecasting, said in a press release. 

The decline in purchase-loan activity aligns with broader trends the lending and homebuilding markets are facing this year. Data released this week by the U.S Census Bureau and U.S. Department of Housing and Urban Development also showed housing starts for new single-family homes in June falling to a two-year low, with the total coming in below 1 million, an 8.1% drop from May. Also, issuance of single-family building permits has slowed from last year’s rate of activity after starting the year ahead of it. 

The MBA has reported that overall purchase activity is down between 10% to 20% year over year, while credit availability has also steadily dropped since January. 

Based on June’s pace, the MBA estimated the volume of new single-family home sales running at a seasonally adjusted annual pace of 620,000 units, declining 14.7% from May’s outlook of 727,000. 

Conventional loans accounted for 73.7% of June’s applications. Federal Housing Administration-backed mortgages made up a remaining 15% of activity, with 10.7% coming through the Department of Veterans Affairs and 0.5% sponsored by the U.S. Department of Agriculture.

A combination of rising interest rates and inflation laid the initial groundwork for the homebuilding slowdown that has only become more intense in ensuing months. 

“Inflation hurts consumer confidence and purchasing power, while higher mortgage rates alongside high home prices dampen affordability. The result? A reduction in home buyer traffic and sales,” said Odeta Kushi, deputy chief economist at First American, in a statement. 

Sluggish sales are leading to decreased output. “The new-home market is particularly sensitive to rising mortgage rates and builders want to ensure that if they build it, someone will buy it. Builders are likely to respond to the decline in affordability and cooling demand by building fewer homes,” she said, echoing an assertion made by both the Mortgage Bankers Association and National Association of Home Builders.

“Production bottlenecks, rising homebuilding costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” said NAHB Chairman Jerry Konter. He added that 13% of builders reduced home prices in the past month to lift sales or reduce cancellations.  

Approximately 57,000 new single-family homes were sold in June, the MBA said, a decrease of 6.6% from 61,000 the prior month, and 13.6% lower than 66,000 transactions reported a year ago. The average loan size of new-home mortgages decreased from $430,855 in May to $426,966.

The current environment has taken a noticeable toll on homebuilder sentiment, which also fell to its lowest since the first months of the COVID-19 pandemic, tumbling for a seventh straight month, according to NAHB. Its industry survey measures homebuilder mood based on sales traffic and expectations among construction businesses.

The decline in sales comes as builders are still dealing with concerns over supply costs, notably in the fluctuations of lumber prices since early 2020. Monthly changes in lumber prices have averaged 2.6% since January 2020, compared to just 0.3% from 1947 to 2020. 

Movement in June provided another example of the volatile nature of lumber costs, which fell 22.6% from May, according to the U.S. government’s Producer Price Index. Lumber prices are now 35% lower since March, but NAHB said any effect on homebuilders so far remains unclear. 

And in spite of the fall in lumber prices, costs of all residential-construction materials increased by 1.5% on a monthly, unadjusted basis in June and have surged 41.7% since early 2020.

“Significant segments of the home-buying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing,” said NAHB Chief Economist Robert Dietz.