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Builder Confidence Declines Amid High Mortgage Rates

Builder confidence in the market for newly built single-family homes fell to its lowest level since December 2022 due to high mortgage rates that approached 8% earlier this month. However, recent economic data suggests housing conditions may improve in the coming months.

NAHB/Wells Fargo Housing Market Index

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for November showed a six-point drop in builder confidence to 34. This marks the fourth consecutive monthly decline in builder confidence, with sentiment levels having fallen 22 points since July.

It is worth noting that almost all of the HMI data for November was collected before the latest Consumer Price Index was released, which showed moderating inflation.

Impact of Rising Interest Rates on Builder Sentiment

NAHB Chairman Alicia Huey said, “The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market.” Furthermore, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another challenge for housing supply in a market already low on resale inventory.

State and local policymakers can help by reducing regulatory burdens on land development and home building costs, allowing for more attainable housing supply to enter the market, Huey added.

Improving Conditions for Home Construction

While builder sentiment was down in November, recent macroeconomic data points to improving conditions for home construction in the coming months. NAHB Chief Economist Robert Dietz said, “In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%.”

Given the lack of existing home inventory, somewhat lower mortgage rates will likely stimulate housing demand and set the stage for improved builder views of market conditions in December, according to Dietz. NAHB forecasts a 5% increase for single-family starts in 2024 as financial conditions ease with improving inflation data in the months ahead.

Builders Reducing Home Prices to Boost Sales

With mortgage rates running above 7% since mid-August, many builders continue to reduce home prices to boost sales. In November, 36% of builders reported cutting home prices, up from 32% in the previous two months. This is the highest share of builders cutting prices during this cycle, tying the previous high point set in November 2022. The average price reduction in November remained at 6%, unchanged from the previous month.

Meanwhile, 60% of builders provided sales incentives of all forms in November, down slightly from 62% in October.

Regional HMI Scores

Looking at the three-month moving averages for regional HMI scores, the Northeast fell one point to 49, the Midwest dropped three points to 36, the South fell seven points to 42, and the West posted a six-point decline to 35.

Despite the decline in builder confidence, the NAHB/Wells Fargo HMI indicates that there is hope for improvement in the housing market as financial conditions ease and inflation data improves in the coming months.

Orginal article: Link To Article – provided by Kansas City Realtors