Homebuilder confidence has been declining for months, but positive developments with mortgage rates are giving them a rosier outlook.
That’s according to the September Housing Market Index (HMI) from the National Association of Home Builders (NAHB) and Wells Fargo. The index rose to 41, growing by two points relative to August. A score above 50 means that a majority of builders are confident about market conditions. The leap can be attributed to falling mortgage rates.
“Builders now have a positive view for future new home sales for the first time since May 2024,” NAHB Chairman Carl Harris said in a statement. “However, the cost of construction remains elevated relative to household budgets, holding back some enthusiasm for current housing market conditions.
“Moreover, builders will face competition from rising existing home inventory in many markets as the mortgage rate lock-in effect softens with lower mortgage rates.”
While the index ticked up in September, it’s still relatively low. In March and April, the index hit 51. It was at 44 in September 2023 and at 46 in September 2022. In 2021, during the post-pandemic housing boom, the index ranged from 75 to 84.
Other metrics in the index show that business is improving for builders. The share of builders that are cutting prices dropped by a percentage point to 32%, the first such decline since April. The average reduction was 5%, the first time this figure fell below 6% since July 2022. The use of sales incentives also fell 3 percentage points to 61%.
While high interest rates eat into profits for builders, they’ve benefited in terms of sales volume due to higher mortgage rates, which are keeping many existing homes off the market. Builders are employing speculative building strategies that have also proved lucrative.
“With inflation moderating, the Federal Reserve is expected to begin a cycle of monetary policy easing this week, which will produce downward pressure on mortgage interest rates and also lower the interest rates on land development and home construction business loans,” NAHB chief economist Robert Dietz in a statement. “Lowering the cost of construction is critical to confront persistent challenges for housing affordability.”
The HMI report is based on a monthly survey of NAHB members, who are primarily regional and local homebuilders. Respondents are asked about their expectations for market conditions over the next six months.
