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As mortgage rates remain elevated above 7%, builder confidence has decreased in September. According to the NAHB/Wells Fargo Housing Market Index (HMI), builder sentiment fell below the break-even measure of 50 for the first time in five months.

Builder confidence in the market for newly built single-family homes in September fell five points to 45. The decrease followed a six-point drop in August, a reflection of builder perception of the high mortgage rate environment.

“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” says NAHB chairman Alicia Huey. “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.”

More builders reported reducing prices to help bolster sales and combat high interest rates. In September, 32% of builders reported cutting prices, an increase from 25% in August. The share is the highest since December 2022, when 35% of builders cut prices. The average price discount remained at 6%. In addition to price cuts, 59% of builders provided sales incentives of all forms in September, more than any month since April.

“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,” says NAHB chief economist Robert 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.”

A special question for the September HMI revealed that 42% of new single-family buyers were first-time buyers on a year-to-date basis in 2023. The reading is significantly higher than the 27% share from a more normalized market in 2018, according to the NAHB.

The HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” Scores are used to calculate a seasonally adjusted index. Any number reading over 50 indicates more builders view conditions as good than poor. All three major HMI indices posted declines in September.

The HMI index gauging current sales conditions fell six points to 51, the component gauging sales expectations in the next six months also declined six points to 49, and the gauge measuring traffic of prospective buyers dropped five points to 30.

The three-month regional moving average fell two points to 54 in the Northeast, dropped three points to 42 in the Midwest, declined four points to 54 in the South, and fell three points to 47 in the West.