The National Association of Home Builders warned on Wednesday that soaring inflation and higher mortgage rates are slowing home sales, with CEO Jerry Howard calling the combination a “perfect storm.”
Howard told “Varney & Co.” on Wednesday that the cost of capital has increased for the consumers and builders alike. He noted that the “cost of labor remains high” as does the “availability of labor.”
“The cost of building materials has gone up 19% year-over-year,” he noted.
Howard provided the insight on the same day the National Association of Home Builders posted its sixth straight monthly decline in June for builder confidence in the market for newly-built single-family homes. Howard pointed to the new data, stressing that it is a “sign of a real slowdown.”
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Builder confidence dropped two points to 67, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on Wednesday, which marks the lowest reading since June 2020.
The index can range between 0 and 100 with any print over 50 indicating positive sentiment. Any reading above 80 signals strong demand.
NAHB Chairman Jerry Konter, a builder and developer from Georgia, warned in a news release that “six consecutive monthly declines for the HMI is a clear sign of a slowing housing market in a high inflation, slow growth economic environment.”
He noted that the “entry-level market has been particularly affected by declines for housing affordability” and that builders are “adopting a more cautious stance as demand softens with higher mortgage rates.”
The average rate on the popular 30-year fixed mortgage soared above 6% on Tuesday for the first time since 2008, according to Mortgage News Daily.
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Howard pointed out that “traffic at our job sites is down below 50,” noting that 50 is the equilibrium mark.
“I’m afraid it is a sign of a real slowdown,” he told host Stuart Varney, noting that housing “leads us into recessions.”
He added, that, “right now the main thing we’re seeing in the transactional phase is that we have to put escalator clauses in everything” so that builders will be able to cover costs, which can’t be foreseen.
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“For example, gas prices are going up on a daily basis. That’s adding to the builders’ cost,” Howard said, noting that those potential added costs could, therefore, be passed onto the buyer of the home per the escalator clauses in contracts.
He explained that the escalator clauses “basically say you have to pay what we pay and we will verify what we are paying.”