U.S. homebuilders are feeling pessimistic about their business for the first time in seven months, thanks to persistently high mortgage rates.
Builder confidence in the single-family housing market dropped by 5 points in September to 45 on the National Association of Home Builders/Wells Fargo Housing Market Index. This decrease follows a 6-point decline in August. Any score below 50 is considered negative.
All three components of the index experienced a decline. Current sales conditions fell by 6 points to 51, sales expectations in the next six months dropped by 6 points to 49, and buyer traffic decreased by 5 points to 30.
Builders attribute this decline to lower affordability caused by higher mortgage rates. Since June, the average rate on the popular 30-year fixed mortgage has been over 7%.
As a result, builders are starting to offer more incentives again. In September, 32% of builders reported cutting prices, compared to 25% in August. This represents the largest share of builders reducing prices since December 2022 when 35% were doing so.
The average price cut was 6%.
“High mortgage rates are clearly impacting builder confidence and consumer demand, as an increasing number of buyers are choosing to delay home purchases until long-term rates decrease,” said Robert Dietz, the NAHB’s chief economist, in a statement.
There is also a shift occurring among buyers still in the market. The NAHB added a new question to this month’s survey and found that 42% of new single-family home buyers so far this year were first-time buyers. This is significantly higher than the historical average of around 27%.
While builders are still benefiting from limited supply in the existing sales market, they are also facing challenges beyond higher interest rates.
“On the supply-side, builders are struggling with shortages of construction workers, buildable lots, and distribution transformers, which further contributes to housing affordability issues. Insurance cost and availability are also becoming growing concerns for the housing sector,” explained NAHB Chairman Alicia Huey, a homebuilder and developer from Birmingham, Alabama.
Regionally, sentiment in the Northeast decreased by 2 points to 54 on a three-month moving average. In the Midwest, it dropped by 3 points to 42. In the South, it declined by 4 points to 54, and in the West, it decreased by 3 points to 47.
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