Despite a persistent shortage of resale homes, builder confidence in the U.S. housing market took a hit in August. The decline can be attributed to higher mortgage rates, which have dampened home-buying interest and posed challenges in the construction process. The current mortgage rates are the highest since November 2022, reaching an interest rate of 7.24% for a 30-year fixed-rate mortgage as quoted on Tuesday morning by lenders, according to Mortgage News Daily.
The rising interest rates have spooked buyers, leading to a decline of 6 points in the National Association of Home Builders’ monthly confidence index, dropping it to 50 for August. This is the first time in eight months that builder sentiment has dropped, despite reaching a yearly high last month. In comparison, a year ago, the index was at 49.
Builders are attempting to attract home buyers back into the market by offering sales incentives. The NAHB reported that 25% of builders in August cut prices for the first time in five months, with an average price reduction of 6%. Additionally, about 55% of builders implemented other incentives to boost sales.
The three gauges that determine overall builder confidence experienced declines:
- Current sales conditions gauge fell by 5 points.
- Future sales gauge fell by 4 points.
- Traffic of prospective buyers gauge fell by 6 points.
Although new construction was anticipated to alleviate the inventory crunch caused by the shortage of resale homes, even builders are not immune to the impact of persistently high mortgage rates.
The Impact of Mortgage Rates on Homebuyers
Comparatively, if the same homebuyer had purchased their property in August 2022 at a rate of 5.25%, their monthly payment would be around $2,208. However, those who were fortunate enough to buy a home during the pandemic in August 2021 enjoyed even lower rates. With a 30-year mortgage rate of 2.99% and a 20% down payment, their monthly payment on a $500,000 home was merely $1,706.
Unfortunately, current challenges persist for builders, including labor shortages, a lack of buildable land, and limited construction equipment. As a result, their outlook for August remains pessimistic.
The National Association of Home Builders (NAHB) acknowledges the continuous struggle with housing affordability but asserts that demand for new construction remains strong due to limited resale inventory. NAHB Chairperson Alicia Huey, a respected custom home builder and developer from Birmingham, Alabama, notes that many homeowners are opting to stay put due to their low mortgage rates.
The Mortgage Bankers Association supports this claim, reporting a nearly 36% increase in mortgage applications for the purchase of new homes compared to the previous year. New homes are becoming increasingly prevalent in the housing market.
In response to these market dynamics, the yield on the 10-year Treasury note reached nearly 4.2% on Tuesday morning. Additionally, homebuilder stocks such as D.R. Horton Inc, Toll Brothers, and Lennar experienced positive trading during the morning session.