Builder Confidence Falls, First Time in 7 Months

WASHINGTON – After steadily rising for seven consecutive months, builder confidence retreated in August as rising mortgage rates nearing 7% (per Freddie Mac) and “high shelter inflation have further eroded housing affordability and put a damper on consumer demand,” according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released.

Builder confidence in the market for newly built single-family homes in August fell six points to 50, the mid-point between optimism and pessimism on the index’s 1-100 scale.

“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” says NAHB Chairman Alicia Huey.

Huey says new-home demand “continues to be supported by a lack of resale inventory as many homeowners elect to stay put because they’re locked in at a low mortgage rate.”

NAHB Chief Economist Robert Dietz also notes that customer traffic has slowed, a “reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%.”

The August HMI survey also found that rising mortgage rates pushed more builders to offer sales incentives to attract homebuyers. After dropping steadily for four months (31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August.

The average decline for builders reducing prices remained at 6%, while the share of builders offering incentives to bolster sales rose to 55% in August from 52% in July. In December 2022, however, 62% of builders were offering incentives.

All three major HMI indices posted declines in August:

• The HMI index gauging current sales conditions fell 5 points to 57
• The component charting sales expectations in the next six months declined 4 points to 55
• The gauge measuring traffic of prospective buyers dropped 6 points to 34

Looking at the three-month moving averages for regional HMI scores, the Northeast increased four points to 56, the Midwest and South were both unchanged at 45 and 58, respectively, and the West edged down a single point to 50.

The HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

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