Home Builder Sentiment Plunges Amid High Interest Rates and Prices

Homebuilder sentiment experienced its first decline in six months during May, as elevated mortgage rates above 7% deterred potential buyers and dampened expectations.

The National Association of Home Builders/Wells Fargo index, a key indicator of housing market conditions, fell by a substantial 6 points to 45, marking its lowest level since the beginning of the year.

This unexpected drop caught economists off guard, with the median forecast in a Bloomberg survey standing at 50.

The decline in sentiment was particularly evident in builders’ outlook for the next six months, with the corresponding measure plummeting by 9 points to 51, the steepest fall since October 2022.

Robert Dietz, Chief Economist at NAHB, attributed this downturn to the lack of progress in curbing inflation, which has driven long-term interest rates higher in the first quarter.

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“The last leg in the inflation fight is to reduce shelter inflation, and this can only occur if builders are able to construct more attainable, affordable housing,” Dietz emphasized in a statement.

Prospective buyer traffic also took a hit, with the NAHB gauge slipping 4 points to 30, the lowest since January.

Similarly, the measure of current sales experienced its first decline since November.

The combination of persistently high prices and 30-year mortgage rates above 7% has pushed home affordability to near-record lows, according to an NAHB index comparing family incomes to metropolitan area home prices.

In response to these challenges, builders have resorted to various strategies to entice buyers, such as buying down customers’ mortgage rates, reducing prices, and offering smaller home sizes in some instances.

As a result, new-home prices have decreased by 1.9% compared to the previous year. However, the resale market continues to face a shortage of homes, with prices in March still 4.8% higher than a year earlier, as reported by the National Association of Realtors.

Despite some builders reporting strong demand due to limited choices in the resale market, the persistence of high borrowing costs has forced many prospective buyers to adopt a wait-and-see approach. “The market has slowed down since mortgage rates increased and this has pushed many potential buyers back to the sidelines,” stated Carl Harris, NAHB Chairman and a builder from Wichita, Kansas.

The NAHB report also revealed that 25% of builders reported cutting home prices in May, a slight increase from 22% in April but a significant drop from 36% in December 2023.

The average price reduction remained steady at 6% for the 11th consecutive month. Furthermore, the share of builders using sales incentives rose to 59% from 57% in April.

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The decline in builder sentiment was observed across all US regions, with the West experiencing the most significant drop of 12 points to 36. The Northeast also saw a substantial decrease of 7 points, settling at 58.