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Persistent 7% Mortgage Rates Cause Slump In Homebuilder Sentiment

Christine Stuart
Sep 19, 2023
new home construction

National Association of Home Builders/Wells Fargo Housing Market Index reveals the steepest decline in recent months.

Persistently high mortgage rates above 7% have had a notable impact on the home construction industry. Builder confidence, a key metric in assessing the health of the new home market, has fallen below the critical benchmark of 50 for the first time in five months, showcasing growing concerns in the housing sector.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) shows a decline of five points in September, bringing the index to 45. This comes after a six-point decrease in August, indicating a trend of diminishing optimism amongst builders.

“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes. Insurance cost and availability is also a growing concern for the housing sector.”

NAHB Chief Economist Robert Dietz echoed these sentiments, pointing out high mortgage rates' effect on builder confidence and consumer demand. 

“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” said Dietz. “Putting into place policies that will allow builders to increase the housing supply is the best remedy to ease the nation’s housing affordability crisis and curb shelter inflation. Shelter inflation posted a 7.3% year-over-year gain in August, compared to an overall 3.7% consumer inflation reading.”

With mortgage rates persisting above the 7% mark, builders are taking measures to boost sales. In September, 32% of builders reduced home prices, a significant rise from 25% in August, marking the highest percentage since December 2022. On average, these price cuts stand at 6%. Furthermore, 59% of builders offered various sales incentives in September, the highest figure since April 2023.

Interestingly, the data also highlighted a shift in the buyer demographic. A question in the September HMI survey unveiled that 42% of new single-family home buyers in 2023 were first-time buyers, a stark contrast to the 27% in a more stable market in 2018.

The HMI, a long-standing monthly survey by NAHB/Wells Fargo, measures builder perceptions on current and expected single-family home sales. The survey also assesses the volume of prospective buyer traffic. Index scores above 50 indicate a positive outlook.

All major HMI indices reported drops in September. The index for current sales conditions decreased six points to 51. The component measuring sales expectations for the next six months also declined six points, standing at 49. The measure for prospective buyer traffic saw a drop of five points, plummeting to 30.

From a regional perspective, the Northeast reported a two-point decrease to 54, the Midwest fell three points to 42, the South declined four points to 54, and the West experienced a three-point drop, settling at 47.

Despite these challenges, July experienced robust new home sales. Data for August is expected soon. On a brighter note, there was a 4% uptick in new home mortgage applications between July and August.

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