September 22, 2023

Builder confidence index falls to five-month low amid high mortgage rates

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The numbers: Builder confidence fell in September to the lowest level in five months as buyer demand waned on the back of persistently high mortgage rates.

Buyers are struggling with rates over 7% and are choosing to wait until they drop, which pushed the National Association of Home Builders’ monthly confidence index down 5 points to 45 in September, the trade group said on Monday.

Despite a lack of inventory of previously owned homes, builders have still lost confidence as fall approaches, with concerns intensifying that high rates will hurt buyers’ purchasing power. The share of builders cutting home prices to boost demand rose in September. 

The September figure fell short of what Wall Street economists were expecting. 

This is the second month in a row that sentiment has dropped among builders. A year ago, the index stood at 46. 

Key details: Builders are boosting sales incentives to attract buyers who are sitting on the sidelines, waiting out high rates.

The share of builders cutting prices to boost sales rose to the highest level in nine months, going up to 32% in September from 25% the previous month, the NAHB said. The average price cut was 6%. 

About 59% of builders were also using incentives other than price cuts to improve sales in September. 

The September survey also showed that there was a rise in the share of first-time buyers. Among buyers of new single-family homes, 42% were first-timers, the NAHB found, which is higher than the 2018 norm of 27%.

The three gauges that underpin the overall builder-confidence index fell:

  • Builders were pessimistic about current sales conditions. That gauge fell by 6 points.

  • They were downbeat on future sales. The gauge fell by 6 points. 

  • Builders were also seeing a drop in traffic among prospective buyers. That gauge fell by 5 points. 

Big picture: Despite their own gloomy outlook, home builders and new homes have thus far been a bright spot in the housing market, given that the industry’s key challenge right now is low supply.

And with the country facing a shortfall of homes due to a decade of underbuilding, builders may be facing steady demand from buyers over the next few years even if interest rates and home prices remain high.

What the NAHB said: “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,” Robert Dietz, chief economist at the NAHB, said in a statement.

What are they saying: “It is clear that the recent increase in mortgage rates [is] having a negative impact on new home builders across the U.S.,” Raymond James analysts wrote in a note. “Every component of the [NAHB index] was lower in September than in August. The regional picture was also very weak, according to the report.”

Market reaction: The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was over 4.3% on Monday morning.

The SPDR S&P Homebuilders exchange-traded fund
XHB
traded higher during the morning session. Shares of big home builders like D.R. Horton
DHI,
+0.73%
,
Toll Brothers
TOL,
+0.08%

and Lennar
LEN,
+1.99%

were mixed.

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