Home builder confidence sinks as mortgage rates rise

Mortgage interest rates of above 7 percent are limiting builder confidence in the housing market, according to September’s National Association of Home Builders/Wells Fargo Housing Market Index.

Builder confidence in the market fell five points to 45, which was below the break-even mark of 50 for the first time in five months. The drop followed a six-point fall in August and comes as mortgage rates reached a 21-year high last month. Builders reported ongoing elevated construction costs, a shortage of skilled labor and a lack of buildable lots.

The lack of resale inventory at the start of this year has shifted the mix of new construction buyers, according to NAHB. Forty-two percent of new single-family homebuyers were first-time buyers this year, much higher than the 27 percent reading from a more typical market five years ago. 

Overall housing starts fell 11.3 percent in August to a seasonally-adjusted annual rate of 1.28 million units amid a steep decline in multifamily production, according to the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Single-family starts fell 4.3 percent to a seasonally-adjusted annual rate of 941,000, which is 2.4 percent higher than a year ago. 

The number of apartments under construction grew to 1.01 million. The multifamily sector, including apartment buildings and condominiums, fell 26.3 percent to an annualized pace of 342,000. The index charting sales expectations in the next six months fell six points to 49 while the measurement of prospective buyer traffic fell five points to 30. 

Existing housing sales fell 13.6 percent in the Midwest on a year-to-date basis and 8.8 percent in the South region. Overall permits increased 6.9 percent to an annualized rate of 1.54 million, while single-family permits are up 7.2 percent from a year ago. Multifamily permits grew 15.8 percent to an annualized pace of 594,000.  

“On the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes,” said NAHB Chair Alicia Huey. “Insurance cost and availability is also a growing concern for the housing sector.” 

NAHB Chief Economist Robert Dietz said more buyers are deferring home purchases until long-term interest rates fall. “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,” he added. 

Thirty-two percent of builders reported cutting home prices this month, compared to 25 percent in August. The average price discount remains at 6 percent. Fifty-nine percent of builders provided sales incentives in September, the most in five months. 

Mortgage rates will remain elevated for the foreseeable future as the Federal Reserve likely increases interest rates at least once more this quarter, added NAHB Assistant Vice President for Forecasting and Analysis Danushka Nanayakkara-Skillington.