US Homebuilder Sentiment Tanks Again Amid Spike in Mortgage Rates, Erasing Months of Gains

High US mortgage rates continue to weaken builder confidence this month
US Homebuilder Sentiment Tanks Again Amid Spike in Mortgage Rates, Erasing Months of Gains
A development of new homes in Eagleville, Pa., on Friday, April 28, 2023. (Matt Rourke/AP)
Bryan Jung

Homebuilder confidence in the American housing market plunged again in September for the second straight month, shocking most analysts.

This comes amid a spike in mortgage rates, which has weighed on homebuyer demand for new housing.

The National Association of Home Builders/Wells Fargo Housing Market Index, which monitors the health of the single-family housing market, saw build confidence tumble to 45 from 50 points, the lowest reading since April.

Any reading below 50 is considered negative.

The decline in builder confidence followed a six-point drop in August, erasing five months of gains.

Homebuilder Sentiment Tumbles Again

Builder sentiment had been rising throughout most of 2023, as limited existing housing stock pushed potential buyers to look for new construction instead.

However, after mortgage rates rose again above 7 percent this month, it weakened demand among would be homebuyers.

“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” said Robert Dietz, chief economist at NAHB.

“Putting into place policies that will allow builders to increase the housing supply is the best remedy to ease the nation’s housing affordability crisis and curb shelter inflation. Shelter inflation posted a 7.3 percent year-over-year gain in August, compared to an overall 3.7 percent consumer inflation reading.”

Meanwhile, the gauge measuring prospective buyer traffic was down five points, to 30.

Mortgage rates are expected to remain elevated, as Federal Reserve officials have suggested that they may continue to keep interest rates at elevated levels for longer than expected, at 5.25–5.5 percent.

Rates on the popular 30-year fixed mortgage are currently hovering around 7.18 percent, according to Freddie Mac, well above the 6.02 percent rate recorded one year ago and the pre-pandemic average of 3.9 percent. It is near the highest level in two decades.

“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7 percent and significantly eroded buyer purchasing power,” said NAHB Chair Alicia Huey, a custom homebuilder and developer from Birmingham, Alabama.

“And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots, and distribution transformers, which is further adding to housing affordability woes.”

Newly published Census Department data from Sept. 19 showed that housing starts in August fell 11.3 percent from July, disproportionately driven by a decline in multifamily housing construction.

Still new starts of single-family homes during that period fell by 4.3 percent as well.

Work on new single-family homes was at 16 percent in August, or a 941,000 annual rate, well below the average pace of construction from mid-2020 to mid-2022.

7 Percent Mortgage Rates Suppressing the Market

Higher mortgage rates have also prompted many home construction firms to offer incentives to attract buyers.

At least 59 percent of builders in September told the survey that they were using incentives, such as buying down interest rates and offering discounts.

Thirty-two percent of builders reported cutting home prices, compared to 25 percent in August, the largest share of firms cutting prices since December last year, at 35 percent.

The average builder price discount remains at 6 percent.

The September HMI survey found that 42 percent of new single-family home buyers were first-time buyers, which was far higher than the 27 percent from pre-pandemic market levels in 2018.

The survey’s current sales conditions index fell six points, to 51, while sales expectations for the next six months among respondents also declined six points, to 49.

“It’s a challenging environment for homebuilders as they deal with shortages of building materials and construction workers. High mortgage rates are taking a toll on the demand for new homes,” Colin O'Leary, a licensed real estate salesperson with Berkshire Hathaway HomeServices Fillmore Real Estate in New York City, told The Epoch Times.

“The cost of homeownership has never been higher. As a result, a growing number of potential first-time homebuyers are putting their dream of homeownership on hold,” Mr. Leary added.

Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.
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