Homebuilder sentiment: Foundation Cracks Under Weight of Mortgage Rates

By Stephen Culp, Reuters

The mood amongst U.S. homebuilders took an unexpected dour turn this month.

The National Association of Home Builders' (NAHB) Housing Market index (USNAHB=ECI) slid five points to land at 45 - the lowest since April - defying analyst expectations that it would hold firm at a neutral 50, which is the dividing line between optimism and pessimism.

Coming on the heels of a 7-point drop in August, the residential construction sector is feeling the stress of rising mortgage rates; the average 30-year fixed contract rate has been above the 7% level since early August, and applications for loans to purchase homes are down 27.5% from a year ago, according to the Mortgage Bankers Association.

"High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," writes Robert Dietz, NAHB's chief economist.

Home construction initially benefited from rising mortgage rates, which resulted in a dearth of pre-owned homes on the market and prompted a demand shift to new builds.

But amid tightening credit conditions and downbeat consumer sentiment, that particular party appears to be over.

The index "has broken sharply to the downside in the past two months as the surge in mortgage rates, and the subsequent drop in mortgage applications to their lowest level since 1995, has made homebuilders nervous," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

A current-month indicator, NAHB is among the more up-to-date housing market metrics.

But for a glimpse into where investors see the sector six months to a year down the road, look to the stock market.

Through that lens, market participants appear to be seeing a Fed pivot in their crystal balls, which should help bring borrowing costs back down to earth.

Over the last 12 months, the S&P 1500 Home Building index (.SPCOMHOME) and the Philadelphia SE Housing index (.HGX) have risen 61.0% and 43.8%, respectively, handily outperforming the broader S&P 500's 14.9% advance over the same period: