Housing MarketReal Estate

Homebuilder sentiment falls again as mortgage rates climb toward 8%

The Fed's higher-for-longer monetary policy stance is raising concern in the industry

With mortgage rates nearly touching 8%, builder confidence dropped four points in October, falling to its lowest point since January 2023, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reported on Tuesday. This is the third consecutive monthly decline in builder confidence.

The HMI index is a monthly survey that gauges NAHB members’ perception of current single-family sales, expected sales for the upcoming six months, and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that builders view conditions as favorable, lower than 50 indicates that builders view conditions as unfavorable.

“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,” NAHB Chairman Alicia Huey said in a statement. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”

Since late September, mortgage rates have jumped nearly 40 basis points, reaching 7.57%, according to Freddie Mac. As a result, many builders had to make some adjustments to boost their sales. According to the survey, 32% of builders reported cutting home prices while 62% of builders provided sales incentives. These numbers are respectively unchanged from the previous month and up from 59% in September. According to the NAHB, the average price discount remained at 6%.

Meanwhile, in September, shelter was the largest contributor to inflation, accounting for over half of the monthly increase. 

Additionally, the NAHB reported that all three major HMI indices posted declines in September. Homebuilders’ gauge of current sales conditions fell to 46. The gauge measuring traffic of prospective buyers declined to 26. And the component charting sales expectations over the next six months fell to 44. 

The three-month moving averages for HMI all declined across the four major regions. 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.

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