Homebuilder confidence in August dropped for the first time this year, reflecting rising mortgage rates and, overall, stubbornly high shelter inflation.
Confidence slipped to 50 points, falling six points, or 10.7% from July, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).
Some reasons: consumers facing headwinds from nearly 7% mortgage rates in August and a 7.7% annual increase in the shelter component of the Consumer Price Index in July.
The HMI index conducts surveys of NAHB members monthly to gauge their perception of current single-family sales, expected sales for the upcoming six months, and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that builders view conditions as good.
"Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August," Alicia Huey, NAHB chairman and a homebuilder from Birmingham, Ala., said in a statement.
Huey added: "But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many home owners elect to stay put because they are locked in at a low mortgage rate."
The latest confidence reading equals May’s level when the index was also around 50. Today’s indexes still remain higher than at the beginning of the year when confidence bottomed at around 31 to 35.
Year over year in August, builder sentiment increased by 2%.
The marketplace
Some good news for potential homebuyers: Builders are currently sitting on a robust supply.
New construction reached 432,000 home units for sale at the end of June 2023 on a seasonally adjusted basis, climbing 0.7% from in May. This amounts to 7.4 months' worth of supply, which somewhat eases the supply shortage homebuyers are facing. This is a dramatic difference from existing homes available for sale, which stood at 3.1 months of inventory in June 2023. A balanced real estate market usually has a listing supply of five to six months, according to the National Association of Realtors.
The NAHB, meanwhile, said builders should be building more to offset the trouble in the existing housing market.
"The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units," NAHB chief economist Robert Dietz said in the statement.
The inventory disparity between new and existing homes reflects higher mortgage rates, which reached almost 7% just last week. Homeowners are not keen on selling because many hold onto historically low interest rates. A recent study has shown that homeowners with 5% or higher mortgage rates are twice as likely to sell their homes than those with lower rates.
The majority — or 80% — of existing homeowners have rates under 5%, according to Zillow.
"That means many homeowners will move only for major life events, like a new baby or retirement," Orphe Divounguy, a senior economist at Zillow Home Loans, wrote in a Zillow report.
The drop in homebuilders' confidence also reflected a dip in recent new home sales — and, thus, price reductions. Construction home sales dropped in June to 697,000 homes, down 2.5% from May.
"The August HMI survey also revealed that rising mortgage rates are causing more builders to use sales incentives to attract home buyers," Dietz said. "The average decline for builders reducing prices remained at 6%."
Despite the June dip, the market remains stable. June produced the second-highest monthly sales in the last 12 months.
"While this latest confidence reading is a reminder that housing affordability is an ongoing challenge," Huey said, "demand for new construction continues to be supported by a lack of resale inventory."
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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