New data from the National Association of Homebuilders (NAHB) found that homebuilder sentiment declined for the ninth straight month in September. The NAHB/Wells Fargo Housing Market Index fell to 46, 3 points lower than August and 37 points lower than January. This indicates low homebuilder confidence, as NAHB classifies a rating as negative if it falls below 50 points.
Each of the index’s three components declined in September. Current sales conditions dropped 3 points to 54, and sales expectations in the next six months fell 1 point to 46. Buyer traffic, the lowest component at only 31, declined 1 point for the month.
There are also regional differences in homebuilder sentiment. The index fell 5 points to 51 in the Northeast and 5 points to 44 in the Midwest. Sentiment decreased at a larger rate in other areas, with a drop of 7 points to 56 in the South, and a drop of 10 points to 41 in the West.
Decreasing home purchase prices can be good news for homebuyers
While the low sentiment may be bad news for homebuilders, there is a silver lining for homebuyers: a growing percentage of homebuilders are lowering the purchase price of homes. Almost 25% of homebuilders lowered their home prices in September, compared to 19% in August. The NAHB also found that most homebuilders have to offer more incentives to homebuyers to sell their properties, giving the buyer a leg up in the current market.
“In this soft market, more than half of the builders in our survey reported using incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions,” Robert Dietz, chief economist at the NAHB, said in a company statement.
Low sentiment stems from an unaffordable market with high interest rates
What is the main culprit for lower sentiment among homebuilders? According to NAHB Chairman Jerry Konter, the main problem is a lack of affordability brought on by high interest rates and home prices. “Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households,” Konter said in an NAHB press release.
Rising mortgage interest rates are a major problem. The federal reserve reports that the average rate for the 30-year fixed-rate mortgage is 6.29% as of September 22, despite falling close to 5.0% in August. Interest rates have more than doubled since the start of 2022 when the rate rested at 3.0%. On top of that, the Federal Reserve raised its benchmark interest rate by 0.75 basis points on Wednesday, September 21. While the Fed’s latest move doesn’t directly affect mortgage interest rates, the latest rate hike may ensure that mortgage interest rates remain elevated for a while.
The NAHB study also found that builders report high construction costs as another reason for the low sentiment. The increasing expenses of land, labor, and materials continue to increase the difficulty homebuilders experience in attempting to generate a profit.
