In a shift of confidence, a greater number of homebuilders express concerns over housing conditions, as revealed by the latest data from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). For the second consecutive month in September, confidence has waned.
The index reading fell to 45, down from August’s 50, crossing below the pivotal 50-point threshold for the first time in five months, surpassing expectations. Economists, polled by Bloomberg, had projected a September index reading of 49.
This decline in builder sentiment coincides with the sustained mortgage rates surpassing 7% over five weeks, constraining affordability. Additionally, rising costs of construction materials and labor further exacerbate the situation.
Alicia Huey, NAHB Chairman and a custom homebuilder from Birmingham, Ala., noted, “The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power… Insurance cost and availability is also a growing concern for the housing sector.”
In response to the mortgage rate surge, builders are implementing various strategies. In September, 32% of homebuilders reduced prices to stimulate sales, up from 25% in August, marking the highest share since December 2022. The average price discount held at 6%.
NAHB chief economist Robert Dietz emphasized, “High mortgage rates are clearly taking a toll on builder confidence and consumer demand… Buyers get sticker shock when they see their high rate on paper alongside extra expenses for maintenance, repairs, and closing costs.”
A report from Redfin revealed that nearly 60,000 home-purchase agreements were canceled in August, equivalent to 15.7% of contracted homes, marking the highest rate in nearly a year.
Jaime Moore, a Redfin Premier real estate agent in Reno, Nev., observed, “I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate. They’re getting cold feet.”
Furthermore, 59% of builders offered incentives in September, the highest figure since April 2023.
Persistently high prices and soaring mortgage rates have significantly impacted affordability. The 30-year fixed mortgage rate remains above 7%, as reported by Freddie Mac, leaving many buyers unable to enter the market.
While builders initially thrived this year due to historically low inventory in the resale market, attracting more entry-level buyers to consider new construction, the landscape has shifted. The NAHB’s findings indicate that 42% of new single-family homebuyers in the year-to-date are first-timers, a notable increase from the 27% during a more typical market in 2018.
However, these buyers are particularly sensitive to rates and prices as they lack equity from a previous home sale. This sensitivity is reflected in builders’ outlook as rates continue to exceed 7%.
The index measuring current sales conditions dropped from 57 in the previous month to 51 in September. Sales expectations for the next six months also declined by 6 points to 49 in September. The gauge measuring traffic of prospective buyers fell five points to 30.
Dietz emphasized, “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.”
On conclusion, the confidence of homebuilders in the housing market faces challenges due to rising mortgage rates and escalating construction costs, impacting their outlook on housing conditions. As they grapple with these hurdles, policymakers must focus on strategies to boost homebuilders’ confidence and alleviate housing affordability concerns.
Source: Yahoo Finance
