Index of Home Builder Confidence Falls

An index of sentiment among U.S. home builders sank to its lowest level in more than 11 years in June as rising interest rates made houses less affordable and sent speculators fleeing, an industry group said Monday.

The National Assn. of Home Builders/Wells Fargo Housing Market Index fell 4 points to 42 in June from an upwardly revised 46 in May, the association said.

The median forecast of analysts polled by Reuters called for a reading of 45.

The index’s reading this month, its lowest since April 1995, is consistent with the association’s forecast that new-home sales will drop 13% in 2006 from a record last year, said David Seiders, chief economist of the association.

But sales may drop more than forecast if speculators cancel “large numbers” of building contracts or if Federal Reserve policymakers raise their target interest rate further after an expected quarter-point increase this month, Seiders 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,” Seiders said. The association has been petitioning the Fed through letters and communication with senior staff to break its cycle of rate increases, he said.

The association 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, Seiders said.

As a result, he said, Fed rate increases are perversely adding to inflation that the Fed has pledged to fight.

Fed funds futures show traders are expecting the Fed to raise its rate to 5.25% in June. Contract yields also reveal that bond markets expect the rate will climb to 5.5% 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.

Los Angeles-based home builder KB Home on Friday said it expected its fiscal third- and fourth-quarter earnings to be well below Wall Street’s forecasts because of a “challenging” housing market for the rest of year.

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