Homebuilding sentiment is dropping sharply, as mortgage rates are rising

Residential home construction by Shea Homes Builders is shown in Encinitas, Calif., May 16, 2023.

Mike Blake | Reuters

Rising mortgage rates are hitting potential homebuyers hard, and that takes the momentum out of the homebuilding market.

Construction sentiment in the market for newly built homes fell six points to 50 in August, according to National Association of Home Builders/ Wells Fargo Housing Market Index. This is the first drop in seven months and the lowest since May, when sentiment rose for the first time outside negative territory. Anything over 50 is considered positive.

“Rising mortgage rates and higher construction costs stemming from a dearth of builders, lack of buildable lots and persistent shortages of distribution transformers all soured construction sentiment in August,” said Alicia Huey, president of NAHB, Home Builders and Developers from Birmingham. , Alabama.

Mortgage rates are now firmly holding above 7%, hitting 7.24% on Monday, according to the Daily Mortgage News. The average interest rate on a 30-year fixed loan increased by more than 7% in the last week of July.

Among the three components of the index, current sales conditions fell by five points, to 57, and sales expectations in the next six months fell four points, to 55. Buyers’ movement fell six points, to 34.

“The decline in customer traffic is a reminder of the larger challenge that housing inflation rose 7.7% from a year ago and accounts for 90% of the July CPI reading of 3.2%,” said Robert Dietz, chief economist at NAHB. He added that the market is currently suffering from a deficit nationwide of about 1.5 million housing units.

Rising mortgage rates and decreasing buyer activity have more builders using sales incentives again. They did this in the second half of last year, when interest rates rose for the first time. Then they pulled out this spring when demand soared.

Now, after falling for four straight months, the share of builders cutting prices has risen to 25% in August from 22% in July. However, the average price cut remained at 6%. The share of construction firms using all kinds of incentives, including interest rate cuts, rose to 55% in August from 52% in July. But it is still less than the 62% share at the end of last year.

Regionally, on the three-month moving average, construction sentiment in the Northeast rose four points to 56. In the Midwest and South, sentiment was unchanged at 45 and 58, respectively. In the West, where housing is the highest, sentiment fell 1 point, to 50.