Homebuilder Sentiment Plummets to a 10-Month Low Amid Soaring Mortgage Rates

Builder confidence in the market for single-family homes has reached its lowest point since January, facing the challenges of high mortgage rates and financing costs.

In October, the National Association of Home Builders/Wells Fargo Housing Market Index fell by four points to 40, with a revised reading of one point lower than September. Any score below 50 is seen as negative, making this the third consecutive decline in builder confidence.

Mortgage rates play a significant role in this decline, reaching a 23-year high. The average rate for a 30-year fixed mortgage has been above 7% for the past two months, resulting in record lows in affordability.

Builders point to higher interest rates as the reason for reduced buyer traffic, particularly among younger buyers who struggle to afford homes in the current market. Additionally, higher rates are making builder development and construction loans more expensive and harder to obtain, negatively impacting housing supply and affordability.

Among the components of the index, current sales conditions dropped four points to 46, sales expectations for the next six months fell five points to 44, and buyer traffic decreased by four points to 26.

In an effort to attract buyers, builders are reintroducing incentives, such as lower mortgage interest rates. In October, 62% of builders reported offering various sales incentives, up from 59% in September, matching the previous high set in December 2022.

Additionally, 32% of builders have reduced home prices, the same as the previous month but the highest rate since December (35%). The average price discount remains at 6%.

“The housing affordability crisis can only be solved by increasing the supply of attainable and affordable housing,” stated Robert Dietz, chief economist at NAHB. “Boosting housing production would help mitigate the rising shelter inflation component, which accounted for more than half of the overall increase in the Consumer Price Index in September and support the Fed’s goal of bringing inflation back down to 2%. However, uncertainty surrounding monetary policy adds to affordability challenges in the market.”

Regionally, builder sentiment on a three-month moving average dropped by four points to 50 in the Northeast, three points to 39 in the Midwest, five points to 49 in the South, and six points to 41 in the West.