Key Takeaways
- The Builder Confidence Index fell for the third consecutive month to 40 from 44 in September.
- Builder sentiment began slipping in August when home loan rates surpassed 7%.
- Nearly one-third of builders cut prices in October to entice more buyers.
Stubbornly high mortgage rates that have climbed to a 23-year high and have remained above 7% for the past two months continue to take a heavy toll on builder confidence, as sentiment levels have dropped to the lowest point since January 2023.
Builder confidence in the market for newly built single-family homes in October fell four points to 40 from a downwardly revised September reading, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the third consecutive monthly drop in builder confidence.
Since late September, mortgage rates are up nearly 40 basis points to 7.57%, according to Freddie Mac. Interest rates have increased on the Federal Reserve’s apparent higher-for-longer monetary policy stance, better than expected macro growth during the third quarter and longer-term concerns over government budget deficits.
As a result of the extended high interest environment, many builders continue to reduce home prices to boost sales. In October, 32% of builders reported cutting home prices, unchanged from the previous month but still the highest rate since December 2022 (35%). The average price discount remains at 6%. Meanwhile, 62% of builders provided sales incentives of all forms in October, up from 59% in September and tied with the previous high for this cycle set in December 2022.
HMI indices decline in October
All three major HMI indices posted declines in October. The HMI index gauging current sales conditions fell four points to 46, the component charting sales expectations in the next six months dropped five points to 44 and the gauge measuring traffic of prospective buyers dipped four points to 26.
Looking at the three-month moving averages for regional HMI scores, the Northeast fell four points to 50, the Midwest dropped three points to 39, the South fell five points to 49 and the West posted a six-point decline to 41.
NAHB's take on the data
“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. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”
“The housing affordability crisis can only be solved by adding additional attainable, affordable supply,” 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.”
