Homebuilder confidence continues to be weighed down by high mortgage rates

By Anna Bahney, CNN

Washington, DC (CNN) — Home builder confidence took a hit in September as average mortgage rates for a 30-year fixed-rate loan stayed above 7%.

Builder confidence in the market for newly built single-family homes in September fell five points to 45, according to the National Association of Home Builders / Wells Fargo Housing Market Index released Monday. This follows a six-point drop in August.

The monthly index looks at current sales, buyer traffic and the outlook for sales of new-construction homes over the next six months. September’s reading is the first time in five months that overall builder sentiment levels dropped below the break-even measure of 50.

“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” said Alicia Huey of the NAHB.

Home builder sentiment had been rising earlier this year, riding the wave of demand caused by lack of inventory in the existing home market. But confidence dropped for the first time this year in August, as rates climbed.

In addition, builders continue to grapple with a shortage of construction workers and buildable lots, which is further adding to housing affordability challenges, said Huey.

All three dimensions of the new housing market evaluated saw declines in September: The index gauging current sales conditions fell six points to 51. The component charting sales expectations in the next six months also declined six points to 49. And the gauge measuring traffic of prospective buyers dropped five points to 30.

“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” said Robert Dietz, NAHB Chief Economist. “Putting into place policies that will allow builders to increase the housing supply is the best remedy to ease 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 3.7% consumer inflation reading.”

New homes have become an attractive alternative for buyers frustrated by extraordinarily low inventory of existing homes as homeowners hunker down with their ultra-low mortgage rates of 2%, 3%, 4% rather than selling and becoming a buyer at a 7% rate.

As mortgage rates stayed above 7% over the last month, more builders cut prices to boost sales, according to NAHB.

In September, 32% of builders reported dropping home prices, compared to 25% in August. That’s the largest share of builders cutting prices since last December. The average price discount is 6%.

Meanwhile, 59% of builders provided sales incentives of all forms in September, more than any month since April.

This available inventory and price flexibility has gotten the attention of first-time homebuyers.

According to the NAHB, 42% of new single family home buyers were first time buyers so far this year. That’s significantly higher than the 27% of first time buyers purchasing new construction homes during the same time period in 2018, when the market was more typical.

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