July 18 (Reuters) – U.S. homebuilder sentiment fell in July to its lowest level since the early months of the coronavirus pandemic, as high inflation and the highest borrowing costs in more than a decade brought traffic to a near halt customers.
Meanwhile, a measure of service sector activity in the US Northeast turned negative this month for the first time in a year, and firms there see no improvement in the next six months.
The National Association of Home Builders/Wells Fargo Housing Market Index fell for a seventh straight month to 55, the lowest level since May 2020, from 67 in June, the NAHB said in a statement Monday. Readings above 50 mean that more builders view market conditions as favorable than unfavorable.
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July’s reading was below all 31 estimates in a Reuters poll of economists who had on average expected a fall to 65. Also, the 12-point decline was the second-largest in the series’ history, dating back to 1985, surpassed only by the decline by 42 points in April 2020, when most of the country was under a COVID-19 lockdown.
“Manufacturing constraints, rising housing costs and high inflation are causing many builders to halt construction as the cost of land, construction and financing exceeds the home’s market value,” NAHB Chairman Jerry Conter, a homebuilder and entrepreneur from Savannah, Georgia , said in a statement. “In another sign of a softening market, 13% of builders in the HMI survey reported cutting home prices in the past month to boost sales and/or limit cancellations.”
The component for current single-family home sales fell to 64 from 76. A gauge of expectations for single-family home sales over the next six months fell to 50 from 61, while the prospective buyer traffic index fell to 37 from 48.
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THE CENT RISE IS STARTING TO BITE
The NAHB report is the first in a series of data expected this week on the poor health of the housing market, which has thrived through much of the pandemic. Americans seeking more living space, often outside cities, and flush with pandemic relief money, big stock market gains and access to mortgages at record-low interest rates thanks to Federal Reserve rate cuts have sent the housing market into overdrive and housing prices soared in early summer 2020.
Now, much of that is quickly reversing as the Fed, facing inflation at its highest rate in four decades, has begun raising interest rates and is far from done on that front. The U.S. central bank has raised its benchmark overnight interest rate by 1.50 percentage points this year from near zero and may raise it by another 2 percentage points or more by the end of the year.
The Federal Reserve is hoping that raising interest rates — and reducing its nearly $9 trillion in U.S. Treasury stocks and mortgage-backed securities — will cool red-hot consumer demand, which for various reasons is outpacing the supply of goods and services and increases inflation.
The housing market is particularly sensitive to interest rates and has so far stood out as the sector most visibly affected by the Fed’s policy shift. Home loan costs have risen this year, with the contract rate on a 30-year fixed-rate mortgage recently approaching 6 percent, a 14-year high, according to the Mortgage Bankers Association.
On Tuesday, the Commerce Department is expected to report that housing starts rose last month from the slowest pace in more than a year, although some economists see any improvement as short-lived.
“We expect housing to begin to lose some momentum in the second half of 2022, with starts averaging around 1.5 million in Q4, but deteriorating homebuilder sentiment creates a downside risk to the forecast,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, wrote in a note.
In addition to the weakness in the new home market that was recently evident in the NAHB and new construction data, sales of existing homes fell for four straight months through May, and data from the National Association of Realtors is expected to show on Wednesday, that the decline continued in June, with the pace of sales the lowest since June 2020.
Meanwhile, a survey by the Federal Reserve Bank of New York showed that activity in the region’s services sector — covering New York state, northern New Jersey and southwestern Connecticut — fell in July for the first time in more than a year.
And while services employment growth remained positive and firms reported some early signs of relief from high inflation, industry executives reported the bleakest six-month outlook since November 2020.
“Firms believe that activity will not pick up over the next six months,” the report said.
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Reporting by Dan Burns; Editing by Chizu Nomiyama and Paul Simao
Our standards: The Thomson Reuters Trust Principles.
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