US homebuilder sentiment plummets due to surge in mortgage rates, wiping out recent progress.
Homebuilder confidence in the American housing market took a nosedive in September, leaving analysts stunned.
This decline comes as mortgage rates soar, dampening the demand for new homes.
The National Association of Home Builders/Wells Fargo Housing Market Index, which tracks the health of the single-family housing market, saw builder confidence plummet from 50 to 45 points, marking 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 on the rise throughout most of 2023, as the limited supply of existing homes pushed potential buyers towards new construction.
However, the surge in mortgage rates above 7 percent this month weakened the demand among prospective homebuyers.
“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are choosing to delay their home purchases until long-term rates decrease,” explained Robert Dietz, chief economist at NAHB.
“Implementing policies that allow builders to increase the housing supply is the best solution to alleviate the nation’s housing affordability crisis and curb rising shelter costs. Shelter inflation rose by 7.3 percent year-over-year in August, compared to an overall consumer inflation rate of 3.7 percent.”
Meanwhile, the gauge measuring prospective buyer traffic dropped by five points to 30.
Mortgage rates are expected to remain high, as Federal Reserve officials have indicated that they may keep interest rates elevated for longer than anticipated, at 5.25–5.5 percent.
Currently, rates for the popular 30-year fixed mortgage hover around 7.18 percent, according to Freddie Mac. This is significantly higher than the 6.02 percent rate recorded a year ago and the pre-pandemic average of 3.9 percent, reaching levels not seen in two decades.
“The decline in builder sentiment over the past two months coincides with the rise in mortgage rates above 7 percent, significantly reducing the purchasing power of buyers,” said NAHB Chair Alicia Huey, a custom homebuilder and developer from Birmingham, Alabama.
“Furthermore, builders continue to face shortages of construction workers, buildable lots, and distribution transformers, exacerbating the challenges in housing affordability.”
Recently published data from the Census Department on September 19 revealed that housing starts in August dropped by 11.3 percent compared to July, with multifamily housing construction experiencing a disproportionate decline.
Even the new starts of single-family homes during that period fell by 4.3 percent.
Work on new single-family homes in August reached only 16 percent, equivalent to an annual rate of 941,000, well below the average construction pace from mid-2020 to mid-2022.
7 Percent Mortgage Rates Suppressing the Market
Higher mortgage rates have led many home construction firms to offer incentives to attract buyers.
In September, at least 59 percent of builders reported using incentives such as buying down interest rates and offering discounts.
Thirty-two percent of builders stated that they had reduced home prices, compared to 25 percent in August. This marks the highest share of firms cutting prices since December of 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, significantly higher than the pre-pandemic market levels in 2018, which stood at 27 percent.
The survey also revealed that the current sales conditions index dropped by six points to 51, while sales expectations for the next six months among respondents declined by six points to 49.
“Homebuilders are facing a challenging environment due to shortages of building materials and construction workers. High mortgage rates are dampening the demand for new homes,” commented Colin O’Leary, a licensed real estate salesperson with Berkshire Hathaway HomeServices Fillmore Real Estate in New York City.
“The cost of homeownership has never been higher. Consequently, an increasing number of potential first-time homebuyers are putting their dreams of homeownership on hold,” added Mr. Leary.
How did the increase in mortgage rates impact the demand for new homes in August?
D that housing starts fell by 3.9 percent in August, further highlighting the impact of rising mortgage rates on the housing market.
The decline in homebuilder confidence is a concerning sign for the housing market, as builders are the key players in driving new construction and meeting the demand for housing. When builder confidence is low, it indicates a lack of optimism about future sales and growth in the industry.
The increase in mortgage rates has played a significant role in dampening the demand for new homes. Higher interest rates mean higher monthly mortgage payments for buyers, making homeownership less affordable. This has led many potential buyers to delay their home purchases in the hope that rates will decrease in the future.
Robert Dietz, the chief economist at the National Association of Home Builders (NAHB), emphasized the need for policies that promote an increase in housing supply. The limited supply of existing homes has been a driving factor in the rise of new construction, but a sustainable solution to the housing affordability crisis requires a more significant increase in the housing supply.
In addition to the impact of higher mortgage rates, builders also face challenges such as shortages of construction workers, buildable lots, and distribution transformers. These factors contribute to the overall challenges in housing affordability and hinder the ability of builders to meet the growing demand for homes.
Looking ahead, the housing market is likely to continue facing challenges as mortgage rates are expected to remain high. The Federal Reserve has indicated that interest rates may remain elevated for longer than anticipated, which will further impact the purchasing power of buyers. It is crucial for policymakers to address these issues and implement strategies that support the housing market and alleviate the affordability crisis.
Overall, the sharp decline in homebuilder confidence reflects the challenges facing the American housing market. The combination of high mortgage rates and supply limitations has dampened demand and hindered the growth of the industry. It is essential for stakeholders to work together to find solutions that promote housing affordability and support sustainable growth in the housing market.
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