Home Builders' Sentiment Sinks to Lowest in 11 Years

U.S. home-builder sentiment sank to its lowest in more than 11 years in June as rising interest rates made houses less affordable and sent speculators fleeing, an industry group said on Monday.

The National Association of Home Builders/Wells Fargo Housing Market Index of sentiment fell 4 points to 42 in June from an upwardly revised 46 in May, the NAHB said. The median forecast of analysts polled by Reuters was for a level of 45.

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The index at its lowest since April 1995 suggests new home sales will drop by 13 percent in 2006 from a record last year, said David Seiders, chief economist of the NAHB.

Risks to NAHB forecasts include the potential for "large numbers" of canceled contracts by speculators and if Federal Reserve policy-makers raise their target interest rate after an expected quarter-point rise this month, he said. Cancellations are already "pretty darn high" and moving higher, he said.

Housing "is the most interest rate sensitive part of the economy so we're obviously very attuned to what the Fed is doing," he told Reuters. The NAHB has been petitioning the Fed through letters and communication with senior staff to break its cycle of rate increases, he said.

The NAHB is urging Fed officials to consider that increases in the consumer price index are partly because of rising rents that result from a weakening single-family housing market, he said. Fed rate increases are perversely adding to inflation that the Fed has pledged to fight, he said.

Fed funds futures show traders are expecting the Fed to raise its rate to 5.25 percent in June. Contract yields also reveal bond markets expect the rate will climb to 5.5 percent in either a half-point move this month or another quarter-point boost in August.

Fallout from rising rates has reverberated through the sector in a litany of warnings.

Home-builder KB Home (KBH) on Friday said it expected its fiscal third- and fourth-quarter income to be well below Wall Street's forecasts because of a "challenging" housing market for the rest of year.

No. 2 builder Pulte Homes (PHM) this month also slashed its profit outlook for the year amid rising rates.

The average 30-year fixed mortgage rate has surged by 1 percentage point in the past year to 6.63 percent, according to Freddie Mac (FRE). The higher rate would increase payments on a $200,000 mortgage by $129 a month.

NAHB sub-indexes also fell to the lowest since 1995. The index gauging sales for the next six months fell 5 points to 50 and the index measuring traffic of prospective buyers declined 4 points to 29. The current sales index fell 3 points to 47.

Softer sales were felt most in the Northeast, where the regional index fell 7 points to 40, the NAHB said.

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