Earlier this month the National Association of Home Builders (NAHB) released its home builder survey and the national index dropped from 38 to 33. A level above 50 signals optimism and expansion, so at this level, it appears builders are feeling slightly more pessimistic. Let’s see why.

There are three portions to their survey, Current Sales which fell 6 points to 39, Future Outlook of sales which fell 4 points to 31, and Prospective Buyer Traffic which dropped 5 points to 20. The Covid low for Prospective Buyer Traffic was 13. All three of these sections of the report have dropped to lower levels.

Jerry Konter, the NAHB Chairman said, “To bring more buyers into the marketplace, 59% of the builders reported using incentives, with a big increase in usage from September to November. For example, in November 25% of builders said that they are paying points for buyers, up from 13% in September. Mortgage rate buy-downs rose from 19% to 27% over the same time frame. And lastly, 37% of builders cut prices in November, up from 26% in September, with an average price reduction of 6%.”

It appears that part of the reason for such pessimism from builders may be a squeeze on their profit margins. Jerry Konter mentioned this and said, “Even as home prices moderate, building costs, labor, and materials — particularly for concrete — have yet to follow,” creating smaller margins for builders which is making it difficult for that industry to maintain profitability.

As these costs come down, we will see optimism grow and new homes added to inventory adding to the very tight supply we see in the Existing Home Sales report, which makes up about 90% of the housing market, and only showed 1.22 million homes in inventory for the month of October.

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