As mortgage rates hit a 23-year high and continue to rise toward the 8% mark [1], builder confidence has been impacted, as the National Association of Home Builders (NAHB) reports [2] that builder confidence in the market for newly built single-family homes in October fell four points to 40 from a downwardly revised September reading, according to the NAHB/Wells Fargo Housing Market Index (HMI)—marking the third consecutive monthly drop in builder confidence.
“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. [3] “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”
Since late September, mortgage rates are up nearly 40 basis points to 7.57%, according to Freddie Mac. Interest rates have increased on the Federal Reserve’s apparent higher-for-longer monetary policy stance, better than expected macro growth during the third quarter and longer-term concerns over government budget deficits.
“The housing affordability crisis can only be solved by adding additional attainable, affordable supply,” said NAHB Chief Economist Robert Dietz [4]. “Boosting housing production would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September and aid the Fed’s mission to bring inflation back down to 2%. However, uncertainty regarding monetary policy is contributing to affordability challenges in the market.”
A trio of industry trade groups recently submitted a letter [5] to Lael Brainard, Director of the National Economic Council and Assistant to the President for Economic Policy, The White House; Janet Yellen, Secretary, Department of the Treasury; Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System; and Sandra L. Thompson, Director of the Federal Housing Finance Agency (FHFA), to reduce the historically large spread between 30-year mortgage rates and 10-year Treasuries to promote homeownership affordability. The proposal set forth by the Independent Community Bankers of America (ICBA), Community Home Lenders of America (CHLA), and National Association of Realtors (NAR) seeks to reduce mortgage rates relative to long-term Treasury bonds.
“With housing accounting for nearly 20% of the nation’s gross domestic product and affecting homeowners and renters nationwide, policymakers must act to promote housing affordability,” ICBA President and CEO Rebeca Romero Rainey [6] said. “ICBA and the nation’s community banks call on the administration to implement our plan to address lending challenges and mortgage-servicing impediments, which could support demand for mortgage-backed securities and reduce mortgage rates by an estimated 100 to 150 basis points.”
And as Americans continue to grapple with affordability issues, many of the nation’s home builders continue to reduce home prices to boost sales. In October, 32% of builders reported cutting home prices, unchanged from the previous month, but still the highest rate since December 2022 (35%). The average price discount remains at 6%. Meanwhile, 62% of builders provided sales incentives of all forms in October, up from 59% in September and tied with the previous high for this cycle set in December 2022.