Persistently high mortgage rates continue to weigh heavily on builder sentiment. For the third consecutive month, builder confidence in the market for newly built single-family homes declined, according to the NAHB/Wells Fargo Housing Market Index (HMI).
Mortgage rates have increased in each of the past five weeks and in 10 of the past 12 weeks, according to data from Freddie Mac. Rates have reached a 23-year high, remaining above 7% for the past two months. The most recent data from Freddie Mac’s Primary Mortgage Market Survey indicates the 30-year fixed-rate mortgage rose to an average of 7.57% as of Oct. 12.
“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,” says NAHB chairman Alicia Huey.
Builder confidence fell four points in October to 40 from a downwardly revised September reading, the lowest sentiment level since January. The index has fallen by 16 points in three months since peaking at 56 in July. A reading below 50 indicates more builders view conditions as poor than good.
In addition to the demand-side impacts on prospective home buyers, Huey says higher rates are also increasing the cost and availability of builder development and construction loans, negatively impacting housing supply and affordability.
Higher rates are causing many builders to reduce home prices to entice buyers off the sidelines and boost sales. According to the NAHB, 32% of builders reported cutting home prices in October, the highest rate since December 2022. The average price discount remained at 6% during the month.
Incentives also remain a popular offering from builders to prospective buyers. Sixty-two percent of builders reported offering sales incentives in October, an increase from September and a tie with previous cycle high from December 2022.
“The housing affordability crisis can only be solved by adding additional attainable, affordable housing,” says 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.”
The NAHB/Wells Fargo HMI gauges builder perceptions of current sales conditions, sales expectations for the next six months, and prospective buyer traffic. In October, each of the three HMI components posted declines.
The index gauging current sales conditions fell four points to 46, the component tracking sales expectations in the next six months decreased five points to 44, and the index measuring the traffic of prospective buyers fell four points to 26.
The three-month moving averages for regional HMI scores fell in each of the four regions in October. The West posted the largest month-over-month decline of six points, while the Midwest had the lowest overall index reading of 39. The three-month moving average HMI score in the Northeast fell four points to 50, and the South fell five points to 49—meaning the HMI scores in every region are either at or below the 50-point mark.