Builder Confidence Weakens Due to Rising Mortgage Rates

Builder confidence in September fell below a reading of 50 for the first time in five months, according to new data from the National Association of Home Builders (NAHB).

The NAHB/Wells Fargo Housing Market Index (HMI) found that builder confidence fell five points to 45 in September, following a six point drop in August—coinciding with rising mortgage rates, which now stand above 7%.

“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” said NAHB Chairman Alicia Huey. “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. Insurance cost and availability is also a growing concern for the housing sector.”

To combat construction challenges and mortgage rates, builders have reported giving more incentives and discounted offers to clients:

  • More builders are reducing home prices again to bolster sales, at 32% in September compared to 25% in August. This is the largest share of builders cutting prices since December 2022 (35%).
  • The average price discount remains at 6%. 
  • Fifty-nine percent of builders provided sales incentives of all forms in September, more than any month since April 2023.

On the other hand, a special question in the September HMI survey revealed that 42% of new single-family homebuyers were first-time buyers on a year-to-date basis in 2023, a much higher rate than the 27% reading from the more normalized market of 2018.

Additionally, all three major HMI indices posted declines in September. The HMI index gauging current sales conditions fell six points to 51, the component charting sales expectations in the next six months fell six points to 49 and the gauge measuring traffic of prospective buyers dropped five points to 30.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell two points to 54, the Midwest dropped three points to 42, the South fell four points to 54 and the West dropped three points to 47.

“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 NAHB Chief Economist Robert Dietz. “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% year-over-year gain in August compared to an overall 3.7% consumer inflation reading.”

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