High Mortgage Rates Dragging Down Builder Confidence

Mortgage rates continue to hover in the 7% range, and higher construction financing costs are dampening builder sentiment.
  • NAHB’s Wells Fargo Housing Market Index fell to 43 in June, indicating lower builder confidence in single-family homes.
  • Higher mortgage rates and construction financing costs are major culprits behind the lower sentiment.
  • Nearly 30% of builders cut home prices in June, with 61% offering sales incentives to bolster sales.
Key Takeaways

According to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reading, builder sentiment in single-family homes is at a 7-month low.

Less Confident

The HMI dipped to 43 in June, 2 points lower than in May. It’s the lowest HMI reading since December 2023 and reflects low builder confidence in the SFR market, which has been an institutional darling for most of the pandemic.

NAHB Chairman Carl Harris highlighted the role of still-high mortgage rates, which are keeping many potential buyers on the sidelines. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots,” he noted.

How It’s Calculated

The HMI survey, which has been conducted for over 35 years, assesses builder perceptions of current single-family home sales, sales expectations for the next six months, and prospective buyer activity. 

All three HMI component indices fell below the key threshold of 50 in June for the first time since December 2023:

  • Current sales conditions: Slipped 3 points to 48
  • Sales expectations over next six months: Fell 4 points to 47
  • Prospective buyer traffic: Slid 2 points to 28

Regional HMI Scores

The three-month moving averages for regional HMI scores also revealed mixed trends:

  • Northeast: Held steady at 62
  • Midwest: Dropped 3 points to 47
  • South: Also fell 3 points to 46
  • West: Slipped 2 points to 41

Economic Context

Of course, high mortgage rates and elevated construction financing costs are all part of broader, global economic challenges. 

According to NAHB Chief Economist Robert Dietz, shelter inflation remains a critical issue. “A lack of progress on reducing shelter inflation, currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%,” Dietz explained. 

He emphasized that boosting the nation’s housing supply and improving the interest rate environment for construction and development loans are essential steps to reducing shelter inflation.

Why It Matters

To cope with prolonged and challenging market conditions, 29% of builders cut new home prices in June, the highest share since January 2024. This figure is also notably higher than the 25% recorded in May. 

Despite this, the average price drop stayed steady at 6% for the twelfth consecutive month. Additionally, the use of sales incentives was up to 61% in June from 59% in May, its highest level since January.

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