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An underrated economic indicator is deeply negative – Washington Examiner | Casual Expat

OA housing indicator bodes particularly badly for the economy.

Homebuilder confidence, which measures market conditions in the single-family housing sector, has plummeted in recent months as the housing market takes a hit and now appears to be facing recessionary conditions.

“Tighter monetary policy from the Federal Reserve and persistently higher construction costs have led to a recession in housing,” said the National Association of Homebuilders’ chief economist Robert Dietz. “The overall volume of single-family startups will see a decline in 2022, the first such decline since 2011.”

Inflation has rattled the economy, rising to 8.3% by the latest CPI reading. Excessive inflation has set off a chain reaction, starting with a rate hike by the US Federal Reserve, which has now impacted housing through higher mortgage rates.

The construction industry is a good indicator of the overall health of the economy and can be a leading indicator of recessions as it supports many jobs and how many goods are used in the construction process. Adam Graham is a construction industry analyst at Fixr, a company specializing in home improvement and remodeling resources. He claims that builder confidence is a crucial measure of the health of various market segments.


The NAHB announced last month that builder confidence has fallen for eight consecutive months. The NAHB/Wells Fargo Housing Market Index found that builder confidence in the new-build single-family home market fell 6 percentage points this month, falling into negative territory for the first time in a short period at the start of the pandemic.

About 1 in 5 homebuilders surveyed reported cutting prices in the last month to limit cancellations or boost sales, while nearly 70% blamed rising interest rates for the decline in housing demand.

“This is a very clear signal from the people who build houses for their living that we are in or about to be in a housing crisis,” Graham said.

Much of this dwindling homebuilder confidence is coming from rising mortgage rates. When the Fed raises its interest rate target (which is another very short-term interest rate), mortgage rates go up as well. Mortgage rates rose above 6% this week for the first time since the Great Recession.

According to Freddie Mac, the average 30-year fixed-rate mortgage is now 6.02%, up more than 3.1 percentage points from last year. That’s a jump of 0.13 points in the past week alone.

The Fed has hiked rates twice by 75 basis points so far this year. The first rate hike was the most aggressive hike since 1994, and there’s expected to be another jumbo rate hike after next week’s Federal Open Market Committee meeting, with some investors even betting the central bank will go one step further and will raise interest rates by 100 basis points up.

When mortgage rates rise, housing becomes less affordable and demand for homes falls. This also reduces the demand for construction.

Housing Starts measures the annualized change in the number of new residential buildings that have started construction. Last month, they fell a whopping 9.6% to 1.45 million on an annualized basis, according to a Tuesday report from the Commerce Department, after posting modest gains in June.

In addition, building permits, which are considered an indicator of future construction, fell by 1.3% in July, further weighing on the housing market.

“Net, net, housing approvals have shrunk every month since the Fed’s first rate hike in March of this year as homebuilders know what’s going on and which way the wind is blowing,” said Chris Rupkey, chief economist at FWDBONDS.

“The recession is right on schedule for housing markets, with rate-sensitive housing being the first sector to turn down as rising mortgage rates make it more costly for homebuyers,” he added.

After 2021 was an explosive year for the housing market due to extremely low mortgage rates, both existing and new home sales began to fall, which is another sign of the recession.

Desmond Lachman is a senior fellow at the American Enterprise Institute who has been warning for months that the housing market is in a bubble. He told that Washington Examiner What economists and home builders are seeing right now is the bursting of that bubble.

According to a report by the National Association of Realtors, existing home sales fell 5.9% in July, marking six consecutive months of declines. Selling is down a whopping 20.2% year-on-year and has accelerated over the year, and the Fed has hiked rates.

Additionally, new home sales have fallen to their lowest level since January 2016. They fell 12.6% in July to a seasonally adjusted annualized rate of 511,000, according to a Census Bureau report.

Lachman said the decline in the housing market portends a recession as its impact spreads to all parts of the broader economic landscape.


“The housing market is slowing down, and when it slows down, it spreads to the rest of the economy,” Lachman said. “The construction workers are fired, then they don’t go to restaurants anymore, they don’t buy goods and so on.”

Reports of new and existing home sales and homebuilder confidence in the coming weeks will be closely scrutinized to see if the housing and construction downturn is accelerating or slowing.

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