U.S. Homebuilder Index Crashes; Estimate Falls Most Since 2014

As Thanksgiving week begins, a surprising economic report went public. The National Association of Home Builders/Wells Fargo Housing Market Index dropped eight points this month to 60. That compared with the median estimate of economists for one point drop to 67. Why? Is this an indicator for next year?

WHY HAVE HOMEBUILDERS TANKED?

As GDP numbers continue to excel, the S&P homebuilders index has failed 30 percent and now the homebuilder's sentiment has dropped to its lowest level in four years. Not only do builders report that sales have slowed abruptly, but expectations for future sales have also fallen.

GDP NUMBERS CAME IN HOT; HOMEBUILDERS FALL 30 PERCENT

This shows builders aren't optimistic about the present or the future.

Why has the index fallen so swiftly as GDP continues to rise? With the economy plugging along, one would expect consumers to increase long-term purchases. Consumers are painting a radically difference picture.

Here are three explanations on the recent drop:

1. WITHOUT MEANINGFUL REAL WAGE GROWTH consumers are unable or unwilling to make larger purchases. In many markets, this is now reflected in greatly reduced sales. For example, Denver sales of more than $500,000 have fallen 44 percent when comparing September 2017 to September 2018. Real wages are not ​growing fast enough to compensate for the rise in property values.

2. RATES HAVE RISEN SUBSTANTIALLY CRIMPING BUYER POWER

10-year treasury rates have risen substantially and driven up 30-year mortgages well above 5 percent from a low around 3 percent. Without wage growth, consumers can't absorb such a large increase and therefore have refrained or delayed from buying properties. This is felt through homebuilder stocks/

3. BUILDING COSTS HAVE RISEN

Building costs have risen due to a shortage of skilled labor that has driven up labor costs. Raw materials have also increased in price thanks to ongoing trade wars. The raw land for building has also increased in most metro areas. All these costs are flowing through to the consumer as the builder is unable to absorb the cost increases.

WHY SHOULD YOU CARE ABOUT THE HOMEBUILDER'S INDEX?

The homebuilders index is a leading indicator of consumer confidence. As consumers feel more anxious about the future, they are less likely to make large financial commitments like a house.

According to Bloomberg economics, previous extended declines in the homebuilder index – which dates to 1985 – have preceded the last three recessions.

IS THE RECENT DROP INDICATIVE OF THE NEXT RECESSION?

Although it is hard to make a case that we are beginning a trend from one economic report, it is important to heed the warning signs. The homebuilder index's recent decline is a stark reminder of where we are in the current economic cycle and the inherent risks in a late cycle.

WHAT SHOULD YOU DO?

This recent economic news should stir some lively family discussions around the holiday dinner table. The homebuilder's sentiment is a leading indicator – a flashing a warning sign, in this case – of what could be to come for consumer confidence.

As Thanksgiving week and the holiday season begin, consumer confidence will be on full display. 

How the consumer reacts to rising rates and the recent market volatility will be crucial to the upcoming year in real estate The homebuilder's recent hiccup is a good reminder to remain alert as the seas are beginning to get a little choppy. 

Only time will tell whether the boat takes on water or is able to sail to smoother waters.

IS A DENVER CRASH COMING?