The housing market has long been regarded as a crucial indicator of economic health. In recent times, however, the dynamics of this market have been greatly influenced by the fluctuations in mortgage rates. The interplay between mortgage rates and the homebuilding industry is particularly evident in the latest developments, where rising mortgage rates are casting a shadow over the once-booming homebuilding market.
The National Association of Home Builders/Wells Fargo Housing Market Index, a widely followed indicator of builder sentiment, has revealed a significant decline in August, according to a recent report in CNBC. This drop of 6 points to a level of 50 marks the first such decline in seven months and is the lowest level seen since the positive trend began in May. This index is a key metric that builders use to gauge market conditions, and any reading over 50 is generally seen as positive. However, the recent dip suggests that the once-robust builder sentiment is now being dampened by a combination of factors, primarily driven by the surge in mortgage rates.
Alicia Huey, the NAHB chair and a prominent homebuilder and developer, attributes the decline in builder sentiment to several factors. Notably, rising mortgage rates have emerged as a significant concern, making home financing less affordable for potential buyers. Coupled with this is the burden of high construction costs, largely stemming from shortages in construction workers and buildable lots, as well as ongoing scarcities of essential resources like distribution transformers.
Mortgage rates have soared to new heights, with rates over 7 percent becoming the new norm; a recent industry report recorded a rate of 7.24 percent. The surge was particularly evident in the last week of July, as the average rate for a 30-year fixed loan crossed the 7 percent threshold. This sharp rise in mortgage rates has effectively priced some potential homebuyers out of the market, leading to decreased demand for new homes and thus impacting the builder sentiment index.
Examining the components of the index, the decline in builder sentiment becomes more apparent. Current sales conditions took a hit, falling 5 points to a level of 57, while sales expectations for the next six months decreased by 4 points to 55. The most striking decrease was seen in buyer traffic, plummeting 6 points to a low of 34. The dwindling customer traffic serves as a stark reminder of the broader challenge posed by shelter inflation, which has risen by a staggering 7.7 percent over the past year. This accounts for a substantial 90 percent of the overall Consumer Price Index reading of 3.2 percent for July.
Robert Dietz, NAHB’s chief economist, highlights that the housing market is grappling with a severe shortage of housing units, estimating a nationwide shortfall of around 1.5 million units. This shortage further exacerbates the impact of rising mortgage rates on builder sentiment, as potential homebuyers are finding it increasingly difficult to find suitable and affordable housing options.
To counter the decline in buyer activity, builders are resorting to sales incentives once again. While these incentives were scaled back during a period of surging demand earlier in the year, the current market conditions have compelled builders to reintroduce such strategies. The data reveals that the share of builders reducing prices rose to 25 percent in August, up from 22 percent in July, with the average price cut remaining at 6 percent. Moreover, the percentage of builders offering various incentives, including interest rate reductions, climbed to 55 percent in August, although this figure still lags behind the 62 percent recorded at the end of the previous year.
On a regional level, the impact of these trends varies. The Northeast saw a 4-point increase in builder sentiment, reaching a level of 56. The Midwest and South regions maintained their sentiment levels at 45 and 58, respectively. The West, which often boasts higher housing costs, experienced a slight dip of 1 point, landing at a sentiment level of 50.