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High Mortgage Rates Dampen Builder Confidence

Christine Stuart
Nov 17, 2023
home builder

Despite a steep drop to its lowest since December 2022, experts see a glimmer of hope for the housing market.

The housing market continues to face challenges as high mortgage rates, nearing 8% earlier this month, have significantly impacted builder confidence. However, recent economic indicators suggest potential improvement in the coming months.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly built single-family homes plummeted six points to 34 in November. This marks the fourth consecutive monthly decline, with a total drop of 22 points since July, bringing sentiment levels to their lowest since December 2022. Notably, most of the HMI data for November was collected before the latest Consumer Price Index indicated moderating inflation.

“The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market,” said NAHB Chairman Alicia Huey, a custom home builder and developer. “Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market.”

NAHB Chief Economist Robert Dietz provided a more optimistic outlook, suggesting that recent macroeconomic data point towards better conditions for home construction soon. “The 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%. Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December," he said. 

Looking ahead, NAHB forecasts a 5% increase in single-family starts in 2024, as financial conditions ease with improving inflation data. However, with mortgage rates above 7% since mid-August, many builders have resorted to reducing home prices to stimulate sales. In November, 36% of builders reported price cuts, the highest share during this cycle, averaging a 6% reduction. Additionally, 60% of builders offered various sales incentives, slightly down from 62% in October.

The HMI, derived from a monthly survey conducted for over 35 years, measures builder perceptions of current single-family home sales and sales expectations for the next six months. It also assesses the traffic of prospective buyers. All three major HMI indices declined in November, with current sales conditions, future sales expectations, and buyer traffic dipping significantly.

Regionally, the Northeast, Midwest, South, and West all showed declines in their three-month moving averages, reflecting the widespread impact of current market conditions on builder confidence across the United States.

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