For the first time in five months, homebuilder sentiment levels dropped below the key break-even measure of 50, mostly reflecting the difficulties of persistent 7% mortgage rates.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report showed that builder confidence fell 5 points in September to a reading of 45, following a six-point drop in August.
The HMI index is a monthly survey that gauges NAHB members’ perception of current single-family sales, expected sales for the upcoming six months, and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that builders view conditions as favorable, lower than 50 indicates that builders view conditions as unfavorable.
“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” said Alicia Huey, NAHB Chairman and a homebuilder from Birmingham, Alabama.
Meanwhile, builders are faced with shortages of construction workers, buildable lots and distribution transformers, she added. Insurance cost and availability are also growing concerns for the housing sector.
In August, shelter inflation posted a 7.3% year-over-year gain, compared to an overall 3.7% consumer inflation reading.
In that context, increasing the housing supply is the best solution to “ease the nation’s housing affordability crisis and crib shelter inflation,” NAHB Chief Economist Robert Dietz said.
Additionally, prices on new homes declined in August. In September, 32% of builders reported cutting home prices, compared to 25% in August, the largest share since December 2022 (35%). Meanwhile, 55% of builders used incentives to bolster sales in August, up from July’s 52%. However, it remained lower than in December of last year (62%).
With the lack of existing-home inventory, the new construction buyer mix also shifted. Indeed, 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, up from the 27% in 2018.
The NAHB reported that all three major HMI indices posted declines in September. Homebuilders’ gauge of current sales conditions fell 6 points to 51. The gauge measuring traffic of prospective buyers declined 5 points to 30. And the component charting sales expectations over the next six months fell 6 points to 49.
The three-month moving averages for HMI all declined across the four major regions. The Northeast fell two points to 54, the Midwest dropped three points to 42, the South fell four points to 54 and the West posted a three-point decline to 47.
However, new home sales remained strong in July, while the data for August is coming in on Tuesday. Also, mortgage applications for new home purchases increased 4% between July and August.