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54 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Builder Confidence is Waning Affordability concerns weigh heavy on NAHB members, a study reports. B uilder confidence is de- clining, according to the National Association of Home Builders (NAHB)/ Wells Fargo Housing Market In- dex (HMI), which fell eight points to 60 in November. While the index measuring current sales conditions fell seven points to 67, the component gaug- ing expectations in the next six months dropped 10 points to 65, and the metric charting buyer traffic registered an eight-point drop to 45, the NAHB said. The monthly HMI is de- rived from a monthly survey of NAHB members and gauges builder perceptions of the cur- rent single-family home sales and sales expectations for the next six months. The survey also asks builders to rate traffic for prospec- tive buyers. In November, growing concerns over affordability were the key factor that drove the builder senti- ment down. Despite the sharp drop, however, NAHB said that builder sentiment remained in positive territory. "Builders report that they continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising inter- est rates and home prices," said Randy Noel, Chairman, NAHB. The prospect of future interest rate hikes had also made builders take a more cautious approach on the market, according to Robert Dietz, Chief Economist, NAHB. "For the past several years, short- ages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction," Dietz said. "While home price growth accommo- dated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumula- tive run-up in pricing has caused housing demand to stall." Additionally, Dietz said that recent policy statements on economic conditions lacked commentary on housing even as housing affordability hit a decade low. "Given that housing leads the economy, policymakers need to focus more on residential market conditions," he said. Feeling Locked Out Homeowners cite home prices for keeping them out of the housing market. H omeowners are spend- ing more and more on remodeling, accord- ing to a recent report from BuildFax. The BuildFax October Housing Health Report found that the rate of remodel- ing spending increased by 16.57 percent year-over-year, despite a drop in remodel volume by 4.21 percent in that same time. BuildFax notes that the in- creased spending and decreased volume may be due to home- owners feeling "locked in" to their homes, hesitant to re-enter the housing market. "Home prices are outpacing wage growth substantially," said Holly Tachovsky, BuildFax CEO. "These affordability concerns are compounded by mounting mort- gage rates and rising construction costs. As a result, homeowners, unable to re-enter the housing market, are reinvesting in their existing properties. The increase in remodel spend suggests the scope of these projects has risen, despite seeing a dip in remodel volume. Homeowners may feel unprepared to enter the housing market, but they are making larger investments in the health of their existing property." Rocky Stubbs, SVP, Direct Lending, Flagstar Bank, also notes the increased amount of home- owners staying put rather than moving out, increasing remodeling spending. "We're entering the most chal- lenging part of the cycle," Stubbs said. "Some first-time homebuy- ers may no longer qualify. And existing homeowners looking to upgrade but have locked into low rates now have the incentive to stay put and remodel rather than trade up. Additionally, the report found that maintenance volume has decreased year-over-year as well, down by 0.41 percent. This may be due in part to the drop in rebuilding following a spike after last year's hurricane season. For example, Florida saw a 7.83 percent decline in maintenance volume year-over-year, after mainte- nance volume jumped following Hurricane Irma. Another finding in the report was an increase in Accessory Dwelling Units (ADU). BuildFax found that ADU construction activity has increased substan- tially in California, Oregon, and Washington. California shows the continued highest volume of ADU construction activity with a year- to-date increase of 53.7 percent. "Builders report that they continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices." —Randy Noel, Chairman, NAHB