Real Estate

Homebuilder sentiment slips to 61 in December

Confidence among U.S. homebuilders took an unexpected step backward in December, as fewer potential buyers toured their properties. A monthly index from the National Association of Home Builders (NAHB) fell one point to 61. Fifty is the line between positive and negative, so sentiment is still good overall, but the expectation had been for a one point gain.

"For the past seven months, builder confidence levels have averaged in the low 60s, which is in line with a gradual, consistent recovery," said NAHB Chief Economist David Crowe. "With job creation, economic growth and growing household formations, we anticipate the housing market to continue to pick up traction as we head into 2016."

A construction worker builds a wall of a home at a Lennar development in Doral, Florida.
Mark Elias | Bloomberg | Getty Images

Builders are still citing the high costs of buildable lots and labor as challenges to a stronger recovery. There is also the potential that mortgage rates, which have been rising already, could move even higher, if the Federal Reserve raises its lending rate Wednesday for the first time in seven years.

Mortgage rates do not follow the Fed rates directly, and could actually move lower, depending on investor reaction to the Fed's latest read on the economy. There is, however, a broad expectation that mortgage rates will rise modestly through 2016.

Higher rates could affect builders disproportionately, as new homes come at a price premium to existing homes. That premium has been wider than usual due to higher costs for builders today. Builders have, however, been focusing more on the higher end of the home buying market; these consumers are not as rate-sensitive as entry-level buyers.

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The NAHB sentiment survey comprises three components: The index measuring sales expectations in the next six months fell two points to 67, the component gauging current sales conditions decreased one point to 66, and the index charting buyer traffic dropped two points to 46. Buyer traffic is the only component that has yet to climb out of negative territory this year.

Regionally, using a three-month moving average to smooth volatility, the sentiment index increased three points to 76 in the West, rose one point to 50 in the Northeast, dropped two points to 58 in the Midwest and fell one point to 64 in the South.