Builder confidence in the newly built single-family home market has dropped for the second consecutive month, continuing the trend of weakened sentiment due to persistently high mortgage rates. According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence fell five points in September, landing at a score of 45. This marks the first time in five months that sentiment has dropped below the key break-even measure of 50.
Impact of High Mortgage Rates on Builder Confidence
The decline in builder confidence coincides with the mortgage rate surge above 7%, which has significantly reduced buyer purchasing power. As mortgage rates remain elevated, fewer buyers can afford to purchase homes, leading to a drop in overall housing demand. In response, many builders are facing increased challenges in securing sales, contributing to a dampened market outlook.
In addition to higher mortgage rates, builders are grappling with persistent shortages in labor, buildable lots, and essential construction materials like distribution transformers. These supply-side constraints, coupled with rising insurance costs and concerns about availability, have exacerbated affordability issues for homebuyers.
Price Reductions and Increased Incentives
In an effort to stimulate sales amid these challenges, builders are increasingly reducing home prices. In September, 32% of builders reported lowering their prices, up from 25% in August. This marked the highest percentage of builders cutting prices since December 2022. On average, price cuts were around 6%. Additionally, 59% of builders offered sales incentives to attract buyers, which represents the highest percentage since April 2023.
First-Time Buyers Gaining Share in New Construction Market
Despite the challenges, the mix of homebuyers has shifted. According to a special question in the September HMI survey, 42% of new single-family home buyers in 2023 were first-time homebuyers. This is a significant increase compared to 27% in 2018, reflecting a changing buyer landscape as many potential homeowners are priced out of the resale market due to limited inventory.
Regional Variations in Builder Confidence
Looking at regional trends, all four major U.S. regions saw declines in builder sentiment. The Northeast’s HMI score fell by two points to 54, the Midwest dropped three points to 42, the South declined by four points to 54, and the West saw a three-point dip to 47. These regional declines show the broad nature of the challenges affecting builders across the country.
Conclusion
With mortgage rates above 7% and ongoing supply-side constraints, builder confidence remains low. While some builders are adjusting by reducing home prices and offering incentives, the overall outlook for the housing market in the near term remains uncertain. To address the housing affordability crisis and ease pressure on builders, experts suggest that policies supporting increased housing supply are essential. Without these changes, the housing market could continue to face affordability challenges and reduced construction activity.