Home-builder confidence plummets to lowest level since 2012 as coronavirus disrupts construction activity

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The numbers: The tone among home builders has quickly turned negative as the coronavirus outbreak hits the U.S. housing market.

The National Association of Home Builders’ monthly confidence index fell a staggering 42 points to a reading of 30 in April from 72 the month prior, the trade group said Wednesday. April’s figure represents the lowest index reading since June 2012.

The decline represents the largest monthly change in the index’s 30-year history. The monthly index is based on a monthly survey in which the National Association of Home Builders asks builders to rate various measures regarding the real-estate market as “good,” “fair,” or “poor.”

Index readings above 50 indicate improving confidence, while a figure below that threshold would signal the opposite. This is the first time since 2014 that the index has dropped below 50.

What happened: Expectations of current single-family home sales slid 43 points to 36. Builders’ views on the traffic of prospective buyers moved lower by that same amount to a reading of 13.

Expectations of home sales in the next six months worsened by almost as much, dropping 39 points to a reading of 36.

While these were substantial drops, all three readings remain above the levels seen during the Great Recession.

On a regional basis, builders were the least optimistic in the Northeast, where the index fell 45 points to 19. The Midwest followed with an index of 25. Builders in the South and West were slightly more upbeat, but still had a very poor view of the housing market.

The big picture: The April report marked a stunning reversal from recent months, when home builders’ confidence hit all-time highs.

Before the coronavirus outbreak reached the United States, home builders were in a strong position. After years of slow home construction activity, Americans’ appetite for new homes had grown considerably. That’s because low-interest rates made home buying more affordable for many Americans, while a dearth of existing homes for sale left them with few options.

The stark shift from March was a reflection of how the index was produced. Although the U.S. began to feel the effects of the pandemic in earnest last month, over half of the survey responses used to produce the index were collected before March 4.

“I liken it to the initial reaction of the stock market,” Jerry Howard, Chief Executive Officer of the National Association of Home Builders, told MarketWatch. “When all this hit, it plummeted. I think it took the housing index a little bit longer to react like that.”

Builders for the time being are still building. The Department of Homeland Security has designated single- and multi-family housing construction as an essential business — and in many states building activity has continued amid stay-at-home orders. Howard argued that construction sites are able to ensure workers’ safety and adhere to social distancing guidelines.

The question is whether buyers will be able to afford these homes. With millions of Americans applying for unemployment after being laid off or furloughed, all signs indicate that home sales activity has all but ground to a halt. The duration of the pandemic will determine how much longer people stay of out of work, and how quickly the nation’s economy — and real-estate market — can bounce back.

“Our industry just lived through a U-shaped recovery coming out of the Great Recession,” Howard said. “What we’ve learned is that it ends up leading to housing affordability problems because it’s more difficult to build in a U-shaped recovery.”

Howard added that the index also reflected builders’ sentiment regarding the stimulus plans Congress has approved thus far. “Banks around the country are inconsistently allowing or disallowing home building companies to apply” for loans through the Paycheck Protection Program that was set up in the most recent stimulus bill, he said. That program allows for small business to apply for loans to cover costs such as payroll while much of the economy is shut down.

“We really need that because our industry employs millions of hourly wage earners, a lot of whom have not been furloughed or laid off in the belief that we would be able to participate in the PPP program and keep our job sites open,” Howard said.

What they’re saying: “The early spring homebuying season clearly will be a bust, but things should improve in June if lockdowns are eased somewhat and people are able to visit new home developments. That said, the unfolding nightmare in the labor market has removed large numbers of potential homebuyers from the pool, so the market can’t quickly return to the robust and rising trend in place before the virus,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Market reaction: D.R. Horton Inc. DHI, +2.35%, Lennar Corp. LEN, +1.67% and Pulte PHM, +2.51% were all down in morning trading immediately after the data release.

The Dow Jones Industrial Average DJIA, -0.41% and the S&P 500 SPX, 0.14% were also down in Tuesday morning trading

Originally Published on MarketWatch

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