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Homebuilder Confidence Drops to New Low

U.S. home builder sentiment sank to a record low in October as borrowers faced difficulty getting mortgages from more stringent lenders, bloating the supply of unsold houses, the National Association of Home Builders said Tuesday.

AP

The NAHB/Wells Fargo Housing Market index fell 2 points to 18, the lowest reading since the gauge started in January 1985.

Economists polled by Reuters had forecast a dip to 19 in the index. Readings below 50 mean more builders view market conditions as poor than favorable.

Sentiment has withered during a two-year housing slump that followed a five-year record home sales and price surge. Loose lending practices led to mounting loan defaults and foreclosures, causing banks and other financial institutions to become much more stringent in approving loans.

A record inventory of unsold houses weighs on the market despite price cuts and other incentives aimed at boosting sales.

"Many prospective buyers may very well have unrealistic expectations regarding new home prices as well as how much they can expect to receive for their existing homes," NAHB Chief Economist David Seiders said in a statement. "When the market is in proper balance, people can recognize a good deal when it comes along; at this point, they view a good deal as a moving target."

A spike in order cancellations is undermining both the mood and profits at U.S. builders.

D.R. Horton , the largest U.S. home builder, earlier Tuesday reported a 39 percent plunge in quarterly net orders for new homes. Tough selling conditions should persist with banks imposing stringer lending standards, the company said.

The expectations component of the NAHB index was unchanged at 26 in October. The trade group calls for homes sales to "stabilize within the next six months and show significant improvement during the second half of next year."

The two other index components, measuring current sales and prospective buyer traffic, each fell two points in October.

"Builders in the field are reporting that, while their special sales incentives are attracting interest among consumers, many potential buyers are either holding out for even better deals or hesitating due to concerns about negative and confusing media reports on home values," NAHB President Brian Catalde said in the statement.

Builder sentiment in the West, where prices posted some of the biggest annual double-digit gains earlier in the decade, sank the most in October. The West's index fell four points to 14, sharply less than this year's peak of 37 in March.

Pain Lingers

The latest housing starts and building permit figures will be released on Wednesday. Economists expect both measures, for September, to have slumped from 12-year lows.

Treasury Secretary Henry Paulson said Tuesday that despite strong U.S. economic fundamentals, the housing downturn is "the most significant current risk to our economy." The longer house prices are flat or falling, "the greater the penalty to our future economic growth," he said.

Federal Reserve Chairman Ben Bernanke late Monday warned that the housing slump would drag on U.S. economic growth through early 2008.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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