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Builder Sentiment in U.S. Shaken by Budget Battle: Economy

Photographer: David Paul Morris/Bloomberg

A contractor checks blueprint plans at a housing project under construction in San Francisco, California. Close

A contractor checks blueprint plans at a housing project under construction in San Francisco, California.

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Photographer: David Paul Morris/Bloomberg

A contractor checks blueprint plans at a housing project under construction in San Francisco, California.

Confidence among U.S. homebuilders fell to a four-month low in October, underscoring the toll that partisan brinkmanship in Washington and the federal government shutdown are exacting on the economy.

The National Association of Home Builders/Wells Fargo index of builder sentiment decreased to 55 this month from a revised 57 in September that was weaker than initially estimated, the Washington-based group reported today. Readings above 50 mean more builders view conditions as good than poor.

The figures show a partial government closing that began Oct. 1 and a political showdown over raising the nation’s borrowing limit are sapping sentiment and prompting companies and consumers to put off spending decisions. Mortgage rates close to a two-year high are also slowing gains in real estate, which has been a source of strength for the expansion.

“The economy is grappling with this near-term shock from the drama in Washington,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York and the top forecaster of the homebuilder index, according to data compiled by Bloomberg. “Sure you can blame the shutdown, but there’s another factor, which is the rise in interest rates.”

The median forecast in a Bloomberg survey called for a decline to 57. Estimates of 48 economists ranged from 54 to 60 after a previously reported September reading of 58.

Stocks Climb

Stocks rallied, sending the Standard & Poor’s 500 Index toward a record, as the Senate crafted a deal to end the government shutdown and raise the debt ceiling. The S&P 500 rose 1.4 percent to 1,721.54 at the close in New York.

Four Federal Reserve districts reported slower economic growth, while the remaining eight said the expansion held steady amid “uncertainty” from the U.S. fiscal deadlock, the central bank said today. Growth remained “modest to moderate” as consumer spending maintained gains and business investment grew, the Fed said in its Beige Book business survey.

“It’s unclear how quickly the economy will bounce back,” Wang said. The government shutdown “should be a temporary shock.”

Stabilization in the European economy will help American companies and the expansion. In the U.K., claims for unemployment benefits fell last month by the most since June 1997, data today from the Office for National Statistics in London showed.

Mortgage Applications

Another report today from the Mortgage Bankers Association in Washington showed mortgage applications for home purchases in the U.S. declined 4.8 percent last week to the lowest level this year.

All three components of the National Association of Home Builders/Wells Fargo survey deteriorated in October. The group’s measure of the sales outlook for the next six months fell to a four-month low of 62 from 64 in September.

Prospective buyer traffic also reached the lowest level since June, falling to 44 this month from 46. The gauge of current single-family home sales decreased to 58 from 60.

Builder confidence weakened in three of the four U.S. regions, with companies in the Northeast, which includes the Washington area, showing the greatest deterioration. The index for the region declined to 31, the lowest level since April. Optimism also wavered in the South and West.

Interest Rates

Borrowing costs for homebuyers have been rising since May. The average rate for a 30-year fixed mortgage was 4.23 percent for the week ended Oct. 10, compared with 3.39 percent a year ago, according to Freddie Mac (FMCC), in McLean, Virginia. In August, the rate reached a two-year high of 4.58 percent and held close to that level through mid-September.

At the same time, sustained buyer demand has outpaced the number of homes on the market, driving prices up to the benefit of builders such as Hovnanian Enterprises Inc. (HOV) and mortgage lenders including Wells Fargo & Co. (WFC)

The housing market “continues to demonstrate strong momentum,” said John Stumpf, chairman and chief executive officer of San Francisco-based Wells Fargo, the largest U.S. home lender. “Home price appreciation remains strong and affordability remains excellent.”

While the government shutdown could harm bank customers and damage the economy in the near term, Stumpf expressed “guarded optimism” in the long run.

“Housing is getting better,” he said on an Oct. 11 earnings call. “For our country, I feel it’s important for our leaders in Washington to set aside partisan differences, break the logjam and find workable solutions that are in the best interest of our nation and our economy.”

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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