In a shift of sentiment, homebuilders are feeling less optimistic about the housing market, with more of them expressing concerns about poor conditions, according to the latest data from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This decline in confidence of homebuilders marks the second consecutive monthly setback in housing market in September.
The index reading, which stood at 50 in August, has fallen to 45 this month, slipping below the critical threshold of 50 for the first time in five months and surprising economists who had expected a reading of 49 for September, as per a Bloomberg poll.
The downturn in confidence of homebuilders is closely tied to the recent rise in mortgage rates, which have remained above 7% for five consecutive weeks, making housing less affordable. Additionally, escalating costs for construction materials and labor have further compounded the challenges faced by builders.
Alicia Huey, Chairperson of NAHB and a custom homebuilder and developer from Birmingham, Ala., attributed the two-month decline in builder sentiment to the moment when mortgage rates crossed the 7% threshold, significantly impacting buyer purchasing power. Huey also pointed out that builders continue to grapple with shortages in construction workers, buildable lots, distribution transformers, and growing concerns about insurance cost and availability.
To combat the shock caused by high mortgage rates, builders are taking steps to entice buyers. The NAHB reports that nearly 32% of homebuilders reduced prices in September, up from 25% in August and the highest share since December 2022. The average price discount held steady at 6%.
NAHB’s Chief Economist, Robert Dietz, remarked on the toll high mortgage rates are taking on builder confidence and consumer demand, noting that more buyers are opting to delay home purchases until long-term rates become more favorable.
In August, nearly 60,000 home-purchase agreements were canceled nationwide, equivalent to 15.7% of homes that went under contract that month, as reported by Redfin. This marks the highest cancellation rate in nearly a year.
Jaime Moore, a Redfin Premier real estate agent in Reno, Nev., expressed her observations, saying, “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.”
Moore explained that buyers are experiencing sticker shock when they see high mortgage rates alongside additional expenses for maintenance, repairs, and closing costs.
Furthermore, 59% of builders offered some form of incentive in September, the highest percentage seen since April 2023.
High prices and surging mortgage rates have significantly impacted housing affordability. According to Freddie Mac, the average rate on the 30-year fixed mortgage remains above 7%, causing many potential buyers to be priced out of the market.
Builders had been experiencing a prosperous year as low inventory levels in the resale market drove more entry-level buyers toward new construction. The NAHB’s findings indicate that 42% of new single-family homebuyers this year were first-timers, significantly higher than the 27% seen during a more typical market in 2018.
However, these first-time buyers are also more sensitive to interest rates and prices, as they don’t have equity from a previous home sale. This sensitivity is reflected in how builders perceive the market’s future as rates exceed 7%.
The index measuring current sales conditions declined to 51 in September from 57 the previous month, while the index measuring sales expectations for the next six months dropped 6 points to 49 in September. Additionally, the gauge measuring traffic of prospective buyers fell by five points to 30.
Robert Dietz emphasized the importance of implementing policies that allow builders to increase housing supply to address 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 consumer inflation reading of 3.7%.
In summary, as housing conditions face headwinds from rising mortgage rates and supply chain challenges, the confidence of homebuilders has dipped, impacting the overall housing market. Measures to enhance housing supply are seen as crucial to addressing affordability issues and mitigating inflation in the shelter market.
Source: Yahoo Finance