Can Home Builders Give the Housing Market a Second Wind?

Thanks to the ongoing partial shutdown of the U.S. government and debt-ceiling brinkmanship, economic confidence has plunged. Gallup’s Economic Confidence Index has dropped from about -20 at the end of September to -41 for the three-day period ended October 13. As measured by Thomson Reuters and the University of Michigan, consumer sentiment is at its lowest level since January.

When confidence falls, economic activity slows down. Consumers become less willing to spend and may put off or altogether abandon plans to make major purchases like a car or a home. What’s more, climbing prices mixed with higher interest rates on mortgages — up to 4.46 percent in August for the 30-year fixed rate, according to Freddie Mac — have helped put the brakes on home sales.

Evidence of this is in pending home sales data. The Pending Home Sales Index compiled by the National Association of Realtors fell 1.6 percent in August. Lawrence Yun, the organization’s chief economist, said: “Sharply rising mortgage interest rates in the spring motived buyers to make purchase decisions, culminating in a six-and-a-half-year peak for sales that were finalized last month. Moving forward, we expect lower levels of existing-home sales, but tight inventory in many markets will continue to push up home prices in the months ahead.”

New home sales, as measured by the U.S. Census Bureau, continued to climb in July but still came in below economist expectations.