Builder confidence dips as rates, costs remain high

Real Estate News

Sentiment drops for the first time since November, with persistent inflation and concerns about new federal rules dampening builders’ outlook.

Even with new home sales on the rise, builders appear less than enthusiastic about the state of the market.

For the first time since November, builder sentiment has taken a nosedive. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index, which measures builder confidence in the single-family home market, landed at 45 in May. That’s down from 51 in March and April — which was the highest level since last July. 

What changed? Mortgage interest rates held steady in the mid-6% range for much of the winter and spring, not hitting the 7% mark until mid-April. And stronger-than-expected economic signals are leading more economists to predict rates will stay “higher for longer” — which could keep buyers away.

At the most recent meeting of the Federal Reserve, Chair Jerome Powell said his confidence that inflation was heading in the right direction “is lower than it was” — suggesting that the Fed is unlikely to cut rates until it sees clear signs that the economy is slowing. 

Powell’s diminishing confidence seems to be rubbing off on home builders. “A lack of progress on reducing inflation pushed long-term interest rates higher in the first quarter and this is acting as a drag on builder sentiment,” said NAHB Chief Economist Robert Dietz. 

“The last leg in the inflation fight is to reduce shelter inflation,” Dietz said, “and this can only occur if builders are able to construct more attainable, affordable housing.” 

Other factors affecting builders: Persistently high interest rates aren’t the only thing weighing on builders. 

Construction costs have been an ongoing issue for the industry, and some builders are concerned that new federal rules from HUD and the USDA, which are intended to promote energy efficiency in new homes, will “further increase the cost of construction in a market that sorely needs more inventory for first-time and first-generation buyers,” said NAHB Chairman Carl Harris, who called it a “senseless nationwide codes mandate.”

Price cuts and incentives: The latest NAHB survey found that 25% of builders cut prices in May, up slightly from 24% the previous month. That percentage had been falling since hitting 36% in December. Incentives, such as rate buydowns, also rose slightly, with 59% of builders reporting the use of sales incentives in May, compared to 57% in April.

Where sentiment is up: While builder confidence dipped nationally, those in the Midwest appear to be feeling more optimistic. Regional sentiment rose three points to 49 in the region, and in the Northeast, sentiment remained relatively high at 61 despite declining in May. 

The biggest drop was in the West, where the index fell four points to 43. The South posted a two-point decline, with sentiment now sitting at 49.