Builder confidence weakens in September
The National Association of Home Builders (NAHB) has attributed mortgage rates rising above 7% as the primary culprit behind declining builder confidence.
The latest NAHB/Wells Fargo Housing Market Index (HMI), measuring home builder sentiment, fell five points to 45. This marks the first time in the past five months that builder confidence in the market for newly-built single-family homes has fallen below the “break-even” level of 50, the NAHB said.
Additionally, this is the second month in a row that the HMI has declined.
“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, a custom home builder and developer from Birmingham, Ala. “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.”
As mortgage rates stayed above 7% over the last month, more builders are reducing home prices again to bolster sales, the NAHB reported.
This month, 32% of builders reported cutting home prices 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%. Meanwhile, 59% of builders provided sales incentives of all forms in September, more than any month since April 2023.
While more pricing-out is now occurring, the lack of resale inventory at the start of 2023 has shifted the new construction buyer mix.
A special question in the September HMI survey revealed that 42% of new single-family home buyers were first-time buyers on a year-to-date basis in 2023. This is significantly higher than the 27% reading from a more normalized market in 2018.
“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.”
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 also declined 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 the West posted a three-point decline to 47.
Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
Builder demand slows in August
The latest BTIG/HomeSphere survey, also indicates that private builder demand is worsening.
Among the private HomeSphere builders surveyed, 26% of respondents reported year-over-year increases in August while 44% saw a decline compared to 24% and 42%, in July.
Traffic also slowed according to survey results, with 40% reporting a decline vs. 21% reporting an increase. In July, just 31% reported declines as 30% reported increases.
Builders were steeling themselves for a slowing, as 28% of builders reported August orders above plan (vs. 31% in July) and 25% saw orders below expectations (24% last month).
"New home demand hasn't been as robust for private builders relative to publics this summer,” said BTIG's Carl Reichardt “Private builders in our survey tend to point to higher interest rates as the culprit. It should be noted that the smaller private builders surveyed tend to operate at higher price points relative to many larger public players who have shifted (in some cases aggressively) to lower-end product over the last few years.”
The latest data for housing starts and permits for August 2023 will be released by The U.S. Census Bureau and the U.S. Department of Housing and Urban Development on Tuesday, Sept. 19.
