July Homebuilder Sentiment Falls 6.25% from June

In our Aug 6^th Blog, we looked at how Demand, or rather dropping Demand, is affecting the Home Building Industry (HBI).  New homes for anything but the top tier just is not selling as well due to Price.  The target customers for the Homes being built can’t justify the hit to monthly cash flow that the higher mortgage principal payment comes with.

The Reverb

The Home Builder Sentiment Index shows the reverb of the above scenario.  It measures how the Builders feel about their forecasted Sales.  Note that the index turns pessimistic at 50 points.  In August, the Sentiment Index fell 5 points, or 6.25% to 75 in one month.  In August 2020, the Index stood at 78, so price pressure is hurting the outlook of the Builders. One oft mentioned building supply, lumber, has dropped 72.4% since its peak in May, demonstrating that when supply and demand (and Wa$$ Street speculators with too much cash get bored & leave) are in balance, Price assumes a more normal level, based on value.  As other building supply channels get up and running, the price of those supplies will likewise fall to value levels, allowing builders to build and price at more affordable levels.

Home Affordability- There’s an Index for that!

Residential new and existing home prices are rated ‘Affordable’ when a family earning the US Median Income, $79,900, can afford one.  In the first three months of 2021, the Index stood at 63.1%.  In the second three months, it moved to 56.0%, the lowest it’s been since at least 2012.  I think it will stay low for at least another six months as those supply chain issues are resolved.

We will watch now for the reverb of the affordability problem.  That 7.1-point drop in the index, or 11.25%, represents a lot of households now looking into alternatives.  Issues in the building supply channels are being worked out every day, so piece by piece builders will see cost pressures drop, allowing them to price their homes so the intended buyer group can afford them.

Demand is THE only influencer in our economy.  Everything else is there to feed it.

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