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U.S. Housing Market Flashes Danger Sign as Confidence Goes South

Last Updated September 23, 2020 1:16 PM
Harsh Chauhan
Last Updated September 23, 2020 1:16 PM
  • The NAHB Housing Market Index (HMI) dropped to 70 in November, the first decline since June.
  • The traffic of prospective buyers has declined despite low mortgage rates.
  • The U.S. housing market could get into more trouble this week as more data releases emerge.

Yet another sign of a simmering U.S. housing market crisis emerged when the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) dropped by a single point  to 70 in November.

While an admittedly small decline, it’s concerning because it’s the first retreat in the HMI reading since June. The index had hit its highest level for 2019 in October. The latest dip adds to a bunch of other negative data, telling us that something may be going wrong with the U.S. housing market.

NAHB housing market index
The NAHB Housing Market Index (HMI) declined for the first time since June, despite support from low interest rates. | Source: Trading Economics 

Another red flag for the U.S. housing market

U.S. housing market bulls would like to believe that the minor slip in the HMI – which measures the confidence of single-family homebuilders – is nothing to worry about. After all, the November 2019 reading is well above the year-ago period’s reading of 60. Moreover, any reading more than 50 is taken as a sign of healthy homebuilder confidence.

However, one shouldn’t forget that this latest piece goes on to reinforce the thought that the U.S. housing market is headed toward bad times. Two of the three components of the HMI reported a decline in November. The traffic of prospective buyers declined 1 point to 53, which seems surprising given that mortgage rates are close to historic lows.

The 30-year fixed-rate mortgage, which is considered as a benchmark, was at 3.75 percent last week. This was well below the previous-year period’s rate of 4.94 percent.

us mortgage rates
Mortgage rates are well below 2018 levels. | Source: Freddie Mac/Twitter 

It looks like the recent uptick in the benchmark fixed-rate mortgage is having a negative impact on the U.S. housing market. Homebuyers are being priced out of the market thanks to tight supply, and an increase in the mortgage rate means that affordability will take a hit. This is probably why the traffic of prospective buyers has started moving south now.

With sales of both new and existing homes declining according to the last available data, it was only a matter of time before prospective buyers started turning negative about getting a new house. Meanwhile, the HMI index measuring current sales conditions also slid two points to 76.

The NAHB report further added to the uncertainty in the U.S. housing market when Chief Economist Robert Dietz remarked:

However, lot shortages remain a serious problem, particularly among custom builders. Builders also continue to grapple with other affordability headwinds, including a lack of labor and regulatory constraints.

More concerning housing market data could appear this week

The NAHB HMI reading is the first of the many U.S. housing market metrics to be released this week, and it hasn’t been solid enough to allay the fears of a crisis. The Commerce Department will release the U.S. housing starts report tomorrow, and a repeat of last month’s performance will spell more trouble for the market.

Ominous signs have already emerged  about October starts as Dodge Data and Analytics estimates that construction starts fell 11 percent last month on account of a gloomy economic outlook. This would be the third straight month of a decline in U.S housing starts.

us housing starts october 2019
US housing starts could be headed for another bad month. | Source: Dodge Data and Analytics 

The U.S. housing starts report will be followed by the existing home sales report from the National Association of Realtors. The existing home sales report was not positive last month; buyers got priced out of the market by tight inventories.

A combination of weak U.S. housing starts and weak sales would give us more evidence that the market is now losing its momentum, and it might not be long before we are in the midst of a full-blown crisis.