Residential: Boom or bust? What ‘lukewarm’ builder sentiment means for the future of the housing market

Recent indicators reflect the current slowdown in the housing market, despite an overall healthy economy. “Both the volume and the momentum in new home sales and existing home sales are struggling,” said Tim Rood, chairman of The Collingwood Group, a Situs company.

“Builder sentiment is lukewarm,” he said during an interview on FOX Business News with Connell McShane. With rising interest rates and tepid expectations among housing industry stakeholders, Rood said the housing market is reaching “a breaking point where borrowers can’t justify the spend.”

During the FOX interview, Rood surveyed the state of housing market and what current indicators forecast for the coming year. “Permits and starts are a leading indicator and look very soft,” he said.

Homebuilder confidence has also hit a two-year low, according to the National Association of Home Builders(NAHB)/Wells Fargo Housing Market Index (HMI), as illustrated in the graphic below.

NAHB Chief Economist Robert Dietz said, “While home price growth accommodated increasing construction costs … rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stand still.”

Many millennials are expected to start new households and enter the housing market in the next two to six years.

“That’s going to be great for demand,” Rood said. However, today, many younger and first-time homebuyers remain on the sidelines. With respect to these homebuyers, realtors relay a sense of feeling “burnt out” and “fatigued,” Rood said.

In the near term, Rood said he was “encouraged on interest rates.” Although the Federal Reserve is widely expected to raise rates in December, Rood said it appears Chair Jerome Powell “is hitting the pause button,” in anticipation of changing business conditions in 2019.

“Is there anything abnormal about what is happening now?” McShane asked Rood.

“Some of the common proxies you would use for a healthy housing market aren’t bearing out,” Rood said, including a robust labor market, strong consumer confidence and rising wages and incomes. Instead, geopolitical issues appear to be contributing to consumer anxiety, including tariffs and “stock market jitters,” he said. As the geopolitical landscape stabilizes and interest rate hikes slow in the year ahead, the housing market is likely to settle into a new normal.

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