In the wake of persistently high mortgage rates, which have soared to a 23-year peak and lingered above 7% for two consecutive months, builder confidence in the housing market is experiencing a significant downturn. According to the latest report from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), confidence among builders in October plunged four points to a score of 40. This dip marks the third consecutive monthly decline in confidence levels.
“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.”
The recent hike in mortgage rates can be attributed to multiple factors. Freddie Mac data shows that rates have risen by approximately 40 basis points since late September, hitting 7.57%. Influences include the Federal Reserve’s "higher-for-longer" monetary approach, an unanticipated macro growth in the third quarter, and long-term apprehensions surrounding government budget deficits.
“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.”
“Lower builder sentiment is concerning because the U.S. housing market faces a structural housing shortage. Demographic tailwinds from millennials continuing to age into their prime home-buying years and a lack of existing home inventory mean that new home construction is essential in meeting shelter demand," said First American Deputy Chief Economist Odeta Kushi. “But higher single-family permits are a sign of cautious optimism. Builders have benefitted from the lack of resale inventory and from their ability to use incentives, such as mortgage rate buydowns to entice buyers off the sidelines. Builders have a huge competitive advantage over the resale market in this way.”
The persistent environment of high interest has spurred many builders to slash home prices in a bid to drive sales. In October, a notable 32% of builders reported reducing their home prices. This statistic remains consistent with the previous month and is the highest since December 2022's 35% rate. On average, the price discount remains at 6%. Concurrently, 62% of builders in October offered various sales incentives, marking an increase from 59% in September and matching the peak rate of December 2022.
The NAHB/Wells Fargo HMI is a monthly survey that evaluates builders' opinions on the traffic of potential buyers. A score exceeding 50 on this index indicates a majority of builders view market conditions as favorable.
All primary HMI indices reported decreases for October. The HMI index for current sales conditions declined four points to 46, sales expectations for the forthcoming six months dropped five points to 44, while the measure for prospective buyer traffic decreased four points to 26.
Examining the three-month moving averages for regional HMI scores, the Northeast observed a decline of four points to 50, the Midwest decreased by three points settling at 39, the South faced a drop of five points reaching 49, and the West experienced a six-point decline to 41.
