US homebuilder sentiment improves further; NY state manufacturing rebounds

By Lucia Mutikani

WASHINGTON (Reuters) – Confidence among U.S. single-family homebuilders improved for a fourth straight month in April as a dearth of previously owned homes and falling mortgage rates boosted demand for new houses, but a shortage of building materials remained a challenge.

Other data on Monday showed manufacturing activity in New York state increased for the first time in five months. Housing and manufacturing have been hammered by the Federal Reserve’s fastest interest rate hiking campaign since the 1980s.

The improvement occurred despite recent financial market turmoil that has heightened the risks of a broader economic downturn. Nevertheless, other sectors of the economy are starting to show strain from the Fed’s battle against inflation. Retail sales dropped for a second month in a row in March and job growth is slowing.

“This is also another indication that any hit to the economy from the banking sector shock will feed through with a significant lag, which will keep the Fed focused on fighting inflation in the near term,” said Michael Pearce, lead economist at Oxford Economics.

The National Association of Home Builders/Wells Fargo Housing Market index edged up one point to 45 this month, the highest level since September. A reading below 50 indicates that more builders view conditions as poor rather than good.

Economists polled by Reuters had forecast the index would be unchanged at 44.

“Builders note that additional declines in mortgage rates, to below 6%, will price in further demand for housing,” NAHB Chairman Alicia Huey, a builder from Birmingham, Alabama, said in a statement. “Nonetheless, the industry continues to be plagued by building material issues, including lack of access to electrical transformer equipment.”

Graphic-U.S. homebuilder sentiment, https://www.reuters.com/graphics/USA-STOCKS/movakyzrkva/NAHB.png

New home sales have risen for three straight months, with buyers eager to take advantage of any dip in mortgage rates. The rate on the popular 30-year fixed mortgage has declined from a peak of 7.08% in early November to 6.27% last week, according to data from mortgage finance agency Freddie Mac.

Mortgage rates have been dropping on views that the Fed’s current monetary policy tightening cycle could be drawing to a close. Residential investment has contracted for seven straight quarters, the longest such streak since the collapse of the housing bubble triggered by the 2007-2009 Great Recession.

U.S. stocks were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

Fewer builders cutting prices

The NAHB survey found 30% of builders reported reducing prices this month, down from 31% in March. The share of those using incentives to boost sales climbed to 59% from 58% in March.

The survey’s measure of current sales conditions rose two points to 51. Its gauge of sales expectations over the next six months increased three points to 50. It was the first time both of these components were at 50 or higher since last June.

The component measuring traffic of prospective buyers was unchanged at 31.

In a separate report on Monday, the New York Federal Reserve said its “Empire State” index on current business conditions jumped 35.4 points to a reading of 10.8 this month. That was the highest reading since last July.

Economists had forecast the index would be at -18.0. A reading above zero signals the New York state manufacturing sector is growing.

Graphic-Atlantic business activity: Empire State and Philly Fed, https://www.reuters.com/graphics/USA-STOCKS/zdvxdawervx/empirestate.png

The rebound is an encouraging sign for national manufacturing activity, which has also been undermined by the rotation of spending back to services from goods.

The Fed reported last Friday that manufacturing output rose at a 0.3% annualized rate in the first quarter after declining at a 3.1% pace in the October-December period.

The Institute for Supply Management’s measure of national manufacturing activity has contracted for five straight months, with all its subcomponents falling below the 50 threshold in March for the first time since 2009.

“Our ISM-style average of the survey’s details suggests the manufacturing sector started the second quarter on a solid footing,” said Oxford Economics’ Pearce. “We expect a slowdown in the broader economy, tighter lending conditions, and a soft global backdrop to pose headwinds for the manufacturing sector through the rest of the year.”

The New York Fed survey’s gauge of new orders shot up 46.8 points to 25.1 this month, while the shipments measure rebounded 37.3 points to 23.9. But manufacturing employment continued to decline, while inflation at the factory gate subsided.

Still, businesses did not expect a significant improvement in conditions over the next six months. The survey’s measure of future business conditions rose to 6.6 from 2.9 in March.

New orders and shipments were seen increasing modestly and employment growing. The capital spending index rose 3.2 points to 16.5, while the technology spending measure fell to 10.3 from 13.3 in March.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)