Homebuilder Sentiment Falls into Negative Territory

According to the National Association of Home Builders (NAHB), homebuilder sentiment fell by three points this month. Now at a score of 46, the index has fallen below the 50-point threshold, indicating that the sentiment is negative.

Falling a few points below the threshold is not necessarily the worst thing that could happen to the housing market but this marks the ninth consecutive month of decline. More importantly, this is the lowest homebuilder sentiment has been since May of 2014 (save for a small, anomalous dip at the start of the coronavirus pandemic, in 2020). Perhaps most importantly, homebuilder sentiment was at a comfortable 83 in January, when interest rates were roughly half of those we are seeing today.

Indeed, home builders are pointing directly at skyrocketing interest rates as the cause of their uncertainty in the market. It makes sense, too, since the average 30-year fixed-rate mortgage—an industry standard—was a comfortable 3 percent at the top of the year but has steadily climbed to more than 6 percent, in June. Since then it has been wavering between 5 and 6 percent, complicating an already pricing housing market. And it does not seem like relief is anywhere in sight as the Federal Reserve is expected to raise the benchmark interest rate again this week, on persistent inflation concerns.

Of course, homebuyer sentiment is also important and this metric is more of the same. According to NAHB Chairman Jerry Konter, who is also a homebuilder and developer, “Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households.”

In addition to this complication, approximately 25 percent of homebuilders have also reported that home prices, overall, are down. In August, that measure was less than 20 percent. Furthermore, all three of the index components—sales conditions, sales expectations (next six months), and buyer traffic—fell by three points to 54, one point to 46, and one point to 31, respectively.

To make matters worse, builders also continue to express concern over higher building costs as well as higher interest rates. Land rates are also up and the escalating cost of labor and material are exacerbating the problem, making it difficult to lower prices in a way that would attract potential home buyers.