American home construction companies are experiencing a negative homebuilders sentiment outlook about their industry for the first time in seven months due to persistently elevated mortgage interest rates.
All three aspects of the index saw declines. Present sales conditions dropped by 6 points to reach 51, future sales expectations within the next six months also decreased by 6 points to 49, and buyer traffic experienced a 5-point decline, reaching 30.
When looking at a three-month moving average, homebuilder sentiment in different regions experienced declines:
- In the Northeast, it decreased by 2 points to reach 54.
- In the Midwest, there was a 3-point drop, bringing it down to 42.
- In the South, it declined by 4 points to 54.
- In the West, there was a 3-point decrease, resulting in a score of 47.
Homebuilders point to reduced affordability as a result of increased mortgage rates. The average rate for the widely-used 30-year fixed mortgage has exceeded 7% since June.
Housing Market Challenges Amid Rising Mortgage Rates
In September, builder confidence in the single-family housing market declined by 5 points to a score of 45 on the National Association of Home Builders/Wells Fargo Housing Market Index. This decrease comes after a 6-point drop in August; any score below 50 is considered unfavorable.
The Commerce Department reported that the construction of single-family homes, which comprise most of homebuilding, decreased by 4.30% to a seasonally adjusted annual rate of 941,000 units last month. This data is consistent with the previously reported figures for July, which indicated a rate of 983,000 units; there were no revisions to those numbers.
A shortage of existing homes for sale has driven up demand for new construction this year, providing some relief to the housing market, which has been heavily impacted by the Federal Reserve’s aggressive tightening of monetary policy.
However, a recent increase in mortgage rates, influenced by rising US Treasury yields, is causing potential buyers to hold off. The average rate for the widely-used 30-year fixed mortgage is approximately 7.18%, the highest since March 2002, as reported by mortgage finance agency Freddie Mac.
A survey released on Monday revealed that the NAHB Housing Market Index fell below the threshold of 50 in September, marking the first time this has happened in five months. Additionally, the survey’s gauge of potential buyers dropped to its lowest point since February.
In August, the construction of housing projects with five or more units plummeted by 26.3% to reach a rate of 334,000 units. The construction of multi-family housing peaked in April 2022 when demand for rental properties surged due to higher mortgage rates deterring potential homebuyers.
Homebuilders Navigate Challenges Amid Housing Demand
Robert Dietz, the chief economist at NAHB, noted that elevated mortgage rates undeniably affect builder confidence and consumer interest. More and more potential buyers are opting to postpone their home purchases until they see a decrease in long-term interest rates.
There’s also a notable change among buyers actively looking for homes. According to NAHB’s survey, 42% of new single-family home buyers have been first-time buyers this year. This percentage is significantly higher than the typical historical average of around 27%.
Builders are still capitalizing on the scarcity of available homes in the existing sales market, but they are encountering challenges beyond just the increase in interest rates.
NAHB Chairman Alicia Huey, a homebuilder and developer from Birmingham, Alabama, highlighted the challenges on the supply side. Builders are still contending with shortages of construction workers, suitable land for building, and distribution transformers, exacerbating housing affordability issues. Additionally, the cost and availability of insurance are becoming growing concerns for the housing sector.
More stringent financial conditions, which restrict builders’ access to credit, coupled with a substantial inventory of multi-family housing currently in the construction phase, are contributing to a slowdown in activity.
In August, housing starts experienced a significant decline of 11.3%, totaling 1.283 million units. Economists surveyed by Reuters had anticipated that housing starts would decrease to a rate of 1.440 million units.