Homebuilder Sentiment Falls to Low Levels as Buyer Traffic Evaporates

A home is offered for sale by owner in Chicago, Ill., on Jan. 20, 2022. (Scott Olson/Getty Images)

Homebuilder sentiment in newly built single-family homes dropped in November as prospective buyers shied away from making a purchase due to high costs, according to the National Association of Home Builders (NAHB).

The NAHB/Wells Fargo Housing Market Index (HMI), which measures homebuilder sentiment, declined five points, to 33, and registered the 11th consecutive monthly decline, as a press release stated on Nov. 16. This is the index’s lowest reading since June 2012, with the sole exception being the spring of 2020 during the COVID-19 outbreak.

“Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce,” said NAHB Chairman Jerry Konter, a homebuilder and developer from Savannah, Georgia.

“With the housing sector in a recession, the Biden administration and new Congress must turn their focus to policies that lower the cost of building and allow the nation’s homebuilders to expand housing production.”

All three components in the HMI posted a decline, with traffic falling five points, to 20; sales expectations in the next six months by four points, to 31; and current sales conditions by six points, to 39.

To attract more customers, 59 percent of builders are now using incentives, with 25 percent paying points to buyers. The NAHB found that 37 percent of the builders had reduced prices in November, up from 26 percent in September, with the price cuts averaging 6 percent.

High Mortgage Rates, Consumer Confidence

The average 30-year fixed-rate mortgage rate has jumped from 3.29 percent at the beginning of the year to 6.62 percent as of Nov. 15, according to data from Mortgage News Daily.

This means that a prospective buyer now has less borrowing power to buy a home than in January. Combined with elevated home prices, many people are put off due to affordability issues.

According to Redfin, 25 percent of homebuyers in the country were looking to change their residences to cheaper metropolitan regions in the third quarter of 2022.

“With a recession looming and household expenses high, many people can’t afford to buy a home in an expensive area and/or want to save money in case of an emergency, which makes relocating somewhere more affordable an attractive option,” said Chen Zhao, research lead at Redfin Economics.

Meanwhile, the Fannie Mae Home Purchase Sentiment Index (HPSI), a measure of consumer confidence, fell 4.1 points, to 56.7, in October. This is the lowest reading since 2011 and the eighth straight monthly fall, according to a press release on Nov. 7.

The “bad time to buy” component of the index hit a survey high, while the “good time to sell” component declined.

“As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months,” said Doug Duncan, Fannie Mae senior vice president and chief economist.