US Homebuilder Sentiment Falls to Lowest Level Since June 2012

In October, the NAHB/Wells Fargo Housing Market Index (HMI), a monthly gauge of builder confidence in the market for newly built single-family homes, fell three points to 29. That was its lowest reading since June 2012, below the 30 recorded in April 2020 and the 32 economists had expected. All three components declined. Current sales conditions fell two points to 33, while sales expectations for the next six months dropped five points to 32.

Prospective buyer traffic also fell five points, to 18. The cost of borrowing was the main trigger. The 30-year fixed mortgage rate averaged 7.40% last week, its highest in nearly three years, Freddie Mac said. NAHB Chairman Bill Owens said mortgage rates had risen well above 7% in recent weeks, while higher gas prices and inflation had further weakened buyer traffic across much of the country.

In October, 43% of homebuilders lowered prices, the largest share in the 2020-2026 period, NAHB reported. The average reduction remained 6% for a seventh consecutive month. Sales incentives, including mortgage-rate buydowns, were offered by 65% of builders. This marked the 19th consecutive month in which at least 60% had used incentives.

Labor is another source of pressure. Owens said more than one-third of builders had reported immigration enforcement activity in their market areas in the past month, leading to construction delays. “Housing remains squeezed by supply-side constraints and significant affordability challenges,” NAHB Chief Economist Robert Dietz said. He added that demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines.

Pantheon Macroeconomics’ Oliver Allen said the typical 30-year mortgage rate had risen to around 7.5%, from roughly 6.6% in early July. He warned that “if anything—confidence is likely to fall much further over the next month or two, given Oxford Economics lowered its forecasts for housing starts, home sales and home-price growth on Monday. A median-income household now earns less than three-quarters of the income needed to afford a median-priced home, and this year’s rise in rates alone has put homeownership out of reach for another 5 million households, said Lead US Economist Nancy Vanden Houten.

She added that Oxford Economics does not expect housing activity to improve meaningfully until around the end of 2027, when it expects mortgage rates to decline. ### XHB/SPY: Back to pandemic levels Wall Street has priced in the slowdown for months. On Monday, the SPDR S&P Homebuilders ETF (NYSE: XHB) traded at 0.1229 relative to the SPDR S&P 500 ETF Trust (NYSE: SPY). The ratio was slightly above last week’s lows but remained at levels last seen during the pandemic crisis.

It closed at 0.1206 on Oct. 14, its lowest level since April 2020. At its late-September 2024 peak, the ratio was close to 0.218. Homebuilders have lost roughly 43% of their value relative to the S&P 500 over two years.

During that period, XHB fell 24%, while SPY gained 34%. This year, the homebuilder ETF is down almost 9%, while the S&P 500 The tracker is up nearly 12%. ## Why Homebuilders Could Become An AI Hedge A shift in the outlook could happen quickly, though it would not necessarily stem from housing. In a Friday note, 22V Research analyst Dennis DeBusschere said the artificial intelligence investment boom has drawn capital away from housing.

“Real Private Residential Fixed investment has not contributed to GDP in 4 years as private fixed investment (AI capex) has accelerated,” he said. DeBusschere said consumer spending and AI capital investment have lifted U.S. growth well above trend. In his account, that has kept 10-year yields high, discouraging buyers from purchasing new homes.

The reverse could also occur: housing could add to economic growth if AI capex were to fall sharply. DeBusschere said the Fed would then cut rates aggressively and 10-year yields would decline. He described being long homebuilders as “an interesting AI capex decline hedge.” Read also: Are Companies Reducing AI Spending? Chip Orders Say Otherwise Image created with artificial intelligence via Midjourney.