US builder confidence falls as housing costs keep rising
Subscribe to our free newsletter today to keep up to date with the latest homebuilding news.
US home builder confidence fell to its lowest level in a year in September as higher mortgage rates, rising construction costs and labor shortages put more pressure on the housing market.
The National Association of Home Builders/Wells Fargo Housing Market Index fell three points to 32 in September. The index measures builders’ views of current sales, future sales and buyer traffic. A reading above 50 means more builders see conditions as good than poor.
The decline was broad. The measure of current sales conditions fell four points to 35, while expectations for sales over the next six months dropped six points to 37. Prospective buyer traffic remained at 23.
Builders are also using more discounts to support sales. In September, 38% of builders cut home prices, up from 35% in August. The average price reduction remained at 6% for the sixth straight month.
At the same time, 66% of builders reported using sales incentives, the highest share since December.
The figures show how affordability pressure is affecting the new home market. Builders need to support buyer demand while managing higher financing, land, labor and material costs.
Higher rates are squeezing buyers and builders
Mortgage rates remain one of the main barriers facing buyers. Higher borrowing costs raise monthly payments and can push households out of the market even when home prices remain steady.
The affordability problem was clear before the latest fall in builder confidence.
NAHB data for the second quarter showed that a household earning the national median income of $106,800 would need 34% of that income to cover the mortgage payment on a median-priced new home. For a household earning half the median income, the share rose to 67%.
Builders face financing pressure of their own.
On Sept. 16, the Federal Reserve raised its target range for the federal funds rate by a quarter percentage point to 3.75% to 4%.
The federal funds rate does not directly set mortgage rates. However, higher interest rates can raise the cost of acquisition, development and construction loans used by builders.
This leaves pressure on both sides of a housing project. Buyers have less room in their monthly budgets, while builders face higher costs before a home is sold.
Sales incentives can help close part of that gap. Builders may offer mortgage rate buydowns, closing cost support or price reductions to keep buyers in the market.
But widespread incentives can reduce margins, especially when construction costs remain high.
The latest sentiment figures suggest these measures are becoming a regular part of sales activity rather than a short-term response to one weak month.
Construction data shows an uneven housing market
Recent building data presents a mixed picture.
US single-family housing starts rose 7.6% in August to a seasonally adjusted annual rate of 918,000 units, according to the Census Bureau.
However, overall housing starts fell 2.6% to an annual rate of 1.275 million units.
Single-family permits also weakened. Authorizations fell 1.8% in August to an annual rate of 878,000. Because permits often come before construction starts, the decline suggests builders remain cautious about future projects.
NAHB said single-family production was down 4.7% year to date despite the August rise in starts. The group cited higher construction costs, shortages of labor and lots, financing costs and economic uncertainty as barriers to stronger activity.
The figures help explain why one month of stronger single-family starts does not point to a broad housing recovery.
Some builders may be moving forward with projects already in their pipelines. Others may be taking a more selective approach to land purchases and new development.
The fall in sales expectations also suggests builders are looking beyond current starts and questioning how much demand the market can support at current borrowing costs.
Recent sales data supports that caution. Sales of newly built single-family homes fell 10.5% in July to an annual rate of 607,000. That was 6.3% below the level recorded a year earlier.
Supply pressures extend beyond interest rates
Financing is only part of the pressure facing builders.
In the September survey, 42% of builders described lot availability as poor and another 38% rated it as fair. Builders also reported pressure from material costs, fuel prices and labor shortages.
Land constraints affect both cost and location.
NAHB research published earlier in September found that single-family construction remained weak across most areas during the second quarter. Smaller metro areas gained some market share as builders looked for locations where land was more available and less expensive.
That shift matters because housing supply cannot respond quickly to demand when land, labor and financing remain costly.
Lower mortgage rates could improve affordability for some buyers. Builders would still need suitable land prices, available workers and more stable material costs before production could increase at a sustained pace.
September’s confidence reading reflects several pressures acting at the same time. Buyers remain sensitive to monthly payments. Builders are using more incentives to support sales. New permits are weakening even as single-family starts show some short-term improvement.
For the construction industry, the direction of the housing market will depend on whether financing costs, development costs and buyer affordability begin to improve together.
Source
