High Mortgage Rates Continue to Hold Back Builder Confidence

Mortgage rates that averaged 6.92% in June per Freddie Mac, along with elevated rates for construction and development loans, continue to put a damper on builder sentiment.

Builder confidence in the market for newly built single-family homes was 42 in July, down one point from June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the lowest reading since December 2023.

While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing.

Despite inflation remaining above the Federal Reserve’s target of 2%, it appears to be back on a cooling trend after a rise in the first quarter. NAHB is forecasting Fed rate reductions to begin at the end of this year, and this action will lower interest rates for home buyers, builders and developers. And while home inventory is increasing, total market inventory remains lean at a 4.4 months’ supply, indicating a long-run need for more home construction.

The July HMI survey also revealed that 31% of builders cut home prices to bolster sales in July, above the June rate of 29%. However, the average price reduction in July held steady at 6% for the 13th straight month. Meanwhile, the use of sales incentives held steady at 61% in July, the same reading as June.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index charting current sales conditions in July fell one point to 47 and the gauge charting traffic of prospective buyers also declined by a single-point to 27. The component measuring sales expectations in the next six months increased one point to 48.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell six points to 56, the Midwest dropped four points to 43, the South decreased two points to 44 and the West posted a four-point decline to 37. HMI tables can be found at nahb.org/hmi.