The Latest Housing Data: Builder Confidence Drops

By at 18 May, 2022, 2:17 pm

by Raymond J. Keating –  

After the economy was hit by the pandemic in March and April 2020, the residential housing sector has been one of the strongest areas of the economy. Housing recovered and moved above pre-pandemic levels rather quickly and growth generally continued.

That has been good news for the small businesses that overwhelmingly populate the industry, for example, 92.4 percent of employer firms in the residential building construction industry have fewer than 10 employees, and 97.3 percent have fewer than 20 workers.

However, no industry is immune from the ills of inflation. The National Association of Home Builders reported on May 17 a significant drop in residential builder confidence. The NAHB/Wells Fargo Housing Market Index (HMI) declined by eight points to 69 in May, which was the fifth consecutive month of declines and the lowest level registered since June 2020.

Why the move down?

NAHB Chief Economist Robert Dietz noted, “Building material costs are up 19% from a year ago, in less than three months mortgage rates have surged to a 12-year high and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family. Entry-level and first-time home buyers are especially bearing the brunt of this rapid rise in mortgage rates.”

No doubt, the direction on builder confidence is the wrong one. But having said all of this, a reading of 69 is still well above the 50 mark on the index, with readings above 50 signaling that “more builders view conditions as good than poor.”

According to the latest Census Bureau latest monthly report on residential construction, April saw both building permits and housing starts move down. April 2022 permits were down by 3.2 percent compared to March, and starts were down by 0.2 percent versus March.

Source: Federal Reserve Bank of St. Louis, FRED

Source: Federal Reserve Bank of St. Louis, FRED

But, as noted in the above charts, even with recent declines, residential housing remains generally strong. Compared to a year earlier, however, permits were up by 3.1 percent and starts had grown by 14.6 percent.

Again, though, direction matters. And as we learned with the Great Recession (late 2007 to mid-2009), housing can be an early indicator for where the economy is headed.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest nonfiction book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.



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