Builders Start to Lose Confidence Again

The decline is not all that significant—at least not yet. The level of confidence as measured by the National Association of Home Builders fell three points from the high registered last month. It is now sitting at 62, which is pretty close to historical highs. As with most of the surveys of this type, any reading over 50 is considered expansionary and numbers below 50 indicate contraction.

The levels are still clearly confident, but the trend is a bit worrying. One of the major issues weighing on the minds of builders is the potential Fed rate hike. A quarter-point hike in the federal funds rate is not likely to send mortgage rates soaring, but they already have risen a bit and will likely go up a little more when, and if, the Federal Reserve pulls the trigger.

There are good and bad aspects as far as the impact of the hike. Mortgage rates will be impacted, and that could push some out of the market. Banks, however, will likely make more loans as their profit margin improves a little. The problem is that nobody really knows how this will affect buyers. Those seeking bigger homes will not be put off that much, but the first-time buyer may struggle.

The long-term worry remains as far as new homebuilders are concerned. They are still seeing far more demand for the multi-family unit than for the single-family home within the Millennial generation. It has become evident that this generation is starting to take an interest in home buying but not until they have reached their 30s. Those who are still in the ranks of the twenty-somethings are not yet ready to settle into the patterns of their predecessors and that can be a long term challenge.

The old pattern was for people to buy a starter home in their twenties and then progressively move up to bigger quarters as they had families. The pattern now seems to be to wait on most of these decisions—they have been slow to leave school and that has generally meant they are leaving with more debt. They are then slow to start families and thus slow to buy homes. They are even slow to settle on a career and a location to settle in. That translates to fewer home purchases in the course of their adult lives.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

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