Home Builder Sentiment Drops Again on Higher Interest Rates

The National Association of Home Builders is attributing “stubbornly high mortgage rates” that have climbed to a 23-year high for a continued drop in home builder sentiment.

Mortgage rates have remained above 7% for the past two months resulting in builder confidence dropping to the lowest point since January.

Builder confidence in the market for newly built single-family homes in October fell four points to 40 from a downwardly revised September reading, according to the NAHB/Wells Fargo Housing Market Index (HMI) released today. 

This is the third consecutive monthly drop in builder confidence. 

“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 NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.” 

Since late September, mortgage rates are up nearly 40 basis points to 7.57%, according to Freddie Mac. 

Interest rates have also increased on the Federal Reserve’s apparent higher-for-longer monetary policy stance, better than expected macro growth during the third quarter and longer-term concerns over government budget deficits, the NAHB said.

“The housing affordability crisis can only be solved by adding additional attainable, affordable supply,” said NAHB Chief Economist Robert Dietz. “Boosting housing production would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September and aid the Fed’s mission to bring inflation back down to 2%. However, uncertainty regarding monetary policy is contributing to affordability challenges in the market.” 

As a result of the extended high interest environment, many builders continue to reduce home prices to boost sales. The NAHB reports that October, 32% of builders reported cutting home prices, unchanged from the previous month but still the highest rate since December 2022 (35%). 

The average price discount remains at 6%. Meanwhile, 62% of builders provided sales incentives of all forms in October, up from 59% in September and tied with the previous high for this cycle set in December 2022. 

All three major HMI indices posted declines in October. The HMI index gauging current sales conditions fell four points to 46, the component charting sales expectations in the next six months dropped five points to 44 and the gauge measuring traffic of prospective buyers dipped four points to 26.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell four points to 50, the Midwest dropped three points to 39, the South fell five points to 49 and the West posted a six-point decline to 41. 

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” 

Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

HMI tables can be found at nahb.org/hmi.  

The latest Monthly New Residential Construction report for September 2023, including housing starts and permits, will be released jointly by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development tomorrow morning.