Decline in Homebuilder Sentiment and Surge in Mortgage Rates Exceeding 7%

Mortgage rate increases are adversely impacting potential homebuyers, impeding growth in the homebuilding market.

The National Association of Home Builders/Wells Fargo Housing Market Index revealed a 6-point decline in builder sentiment, dropping to 50 in August. This marks the first decline in seven months and the lowest level since May, when sentiment rose out of negative territory. A sentiment level above 50 is considered positive.

“Builder sentiment in August waned due to rising mortgage rates, high construction costs resulting from scarcity of construction workers and buildable lots, as well as persistent shortages of distribution transformers,” explained Alicia Huey, NAHB Chair, homebuilder, and developer from Birmingham, Alabama.

According to Mortgage News Daily, mortgage rates have surpassed 7%, reaching 7.24% on Monday. The average rate for a 30-year fixed loan rose above 7% in the final week of July.

Among the index components, current sales conditions dropped 5 points to 57, while sales expectations for the next six months fell 4 points to 55. Buyer traffic also decreased by 6 points to 34.

“Declining customer traffic serves as a reminder of the larger challenge posed by shelter inflation, which has surged 7.7% from a year ago and accounts for a significant 90% of the July Consumer Price Index reading of 3.2%,” commented Robert Dietz, NAHB’s Chief Economist. He further stated that the market is currently facing a nationwide shortage of approximately 1.5 million housing units.

In response to higher mortgage rates and reduced buyer activity, more builders are resorting to sales incentives. This pattern emerged in the latter half of last year when interest rates began to rise, but diminished in the spring during a surge in demand.

After four consecutive months of decline, the percentage of builders implementing price cuts increased from 22% in July to 25% in August. The average price reduction, however, remained steady at 6%. The percentage of builders utilizing various incentives, such as interest rate reductions, rose from 52% in July to 55% in August. However, this figure remains below the 62% reported at the end of last year.

On a three-month moving average, builder sentiment in the Northeast recorded a 4-point increase to 56. Sentiment in the Midwest and South remained unchanged at 45 and 58, respectively. In the West, where housing is notably expensive, sentiment dropped 1 point to 50.