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U.S. builder confidence falls on rising mortgage rates: NAHB

After steadily rising for seven consecutive months, builder confidence retreated in August as rising mortgage rates nearing seven per cent (per Freddie Mac) and stubbornly high shelter inflation have further eroded housing affordability and put a damper on consumer demand.

Builder confidence in the market for newly built single-family homes in August fell six points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many home owners elect to stay put because they are locked in at a low mortgage rate.

Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7 per cent from a year ago and accounted for a striking 90 per cent of the July Consumer Price Index reading of 3.2 per cent. The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.

The August HMI survey also revealed that rising mortgage rates are causing more builders to use sales incentives to attract home buyers. After dropping steadily for four months (from 31 per cent in March to 22 per cent in July), the share of builders cutting prices to bolster sales rose again to 25 per cent in August. The average decline for builders reducing prices remained at six per cent. And the share of builders using incentives to bolster sales was 55 per cent in August, higher than in July (52 per cent) but still lower than in December 2022 (62 per cent).

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo 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.

All three major HMI indices posted declines in August. The HMI index gauging current sales conditions fell five points to 57, the component charting sales expectations in the next six months declined four points to 55, and the gauge measuring traffic of prospective buyers dropped six 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 tables can be found at nahb.org/hmi.