The National Association of Home Builders’ (NAHB) monthly confidence index fell 4 points to 40 in October, the trade group said on Tuesday. Economists surveyed by the Wall Street Journal had expected a 44 reading. This is the third straight drop in the index, which is now at its lowest level since January. A year ago, the index was at 38, but it had improved to 56 in July.

Key Details

Declining Gauges: All three gauges that contribute to the overall builder-confidence index experienced decreases. The gauge that measures current sales conditions fell by 4 points. The component that tracks prospective-buyer traffic also fell by 4 points. Additionally, the gauge that assesses sales expectations for the next six months dropped by 5 points.

Regional Declines: All four NAHB regions saw declines in builder confidence.

The Big Picture

The rise in mortgage rates above 7% has triggered a sharp reversal in homebuilder sentiment, economists said. This suggests a possible "second leg down" in housing starts by year-end, according to economists at Oxford Economics.

What NAHB Said

“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said Alicia Huey, chair of the NAHB. "Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability."

Market Reaction

Stocks DJIA SPX were trading lower in early morning trading while the 10-year Treasury note yield  BX:TMUBMUSD10Y rose 14 basis points to 4.85%. The SPDR S&P Homebuilders exchange-traded fund XHB was trading higher prior to the release of the data.

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