Homebuilders’ sales expectations drop dramatically, as mortgage rates soar

A contractor frames a house under construction in Lehi, Utah, U.S., on Wednesday, Dec. 16, 2020. Private residential construction in the U.S. rose 2.7% in November.

Homebuilders are starting to feel the effects of rising mortgage rates as they prepare for the all important spring housing market.

According to the National Association of Home Builders/Wells Fargo Housing Market Index, sales expectations for the next six months declined 10 points to 70. The index doesn't see a lot of large monthly moves. The view of current sales conditions fell for builders.

The builder sentiment in the market for single-family homes dropped in March. The February read was revised lower. In March of last year, it stood at 81.

This is the fourth straight month that the index has fallen and the first time since last September when the delta variant of Covid-19 was spreading. Positive sentiment is defined as anything over 50.

Builders have long cited building material supply side constraints and rising construction costs as a problem, but now the expectations of higher interest rates are hitting them harder. The average rate on the 30-year fixed-rate mortgage is higher than it was a year ago. The change can be seen in one of the components.

Robert Dietz, chief economist at the NAHB, said that the March HMI recorded the lowest future sales expectations in the survey since June 2020.

The buyer traffic component increased by 2 points.

Dietz said that the impact of elevated inflation and expected higher interest rates suggests caution for the second half of the year.

Sentiment in the Northeast fell on three-month moving averages. The South fell 3 points to 83 and the Midwest dropped 1 point to 72. The West gained 1 point to 90.