U.S. homebuilder sentiment sinks to near 14-1/2-year low in October

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Homebuilder sentiment October low

Highlights

The NAHB/Wells Fargo Housing Market Index dropped three points to 29 in October, its lowest since June 2012 and below expectations of 31.
Freddie Mac reports the 30-year fixed mortgage rate averaged 7.40% last week, highest in nearly three years, intensifying affordability pressures and dampening home sales.
The percentage of builders reporting price cuts to attract buyers surged to 43% in October, with average reductions at 6% and sales incentives used by 65% of builders.

October survey shows broad deterioration

As reported by Reuters, citing the National Association of Home Builders and Wells Fargo, the Housing Market Index fell three points to 29 in October, its lowest level since June 2012 and below economists' forecast of 31 in a Reuters poll.

The survey points to a broad weakening in market conditions. Its measure of current sales conditions falls two points to 33, the gauge of future sales drops five points to 32, and the measure of prospective buyer traffic tumbles five points to 18.

NAHB Chairman Bill Owens says builders are also contending with higher costs for construction loans, building materials and diesel, alongside persistent labor shortages. He says more than one-third of builders report immigration enforcement activity in their market areas during the past month, causing construction delays and discouraging legal workers from reporting to work.

The decline also reflects rising costs linked to tariffs on imports. At the same time, the Middle East conflict is pushing up mortgage rates and the prices of energy-related building materials, adding further strain to builders' operating environment.

Affordability pressures weigh on housing demand

Mortgage rates have surged in recent weeks, with Freddie Mac data showing the 30-year fixed rate averages 7.40% last week, the highest level in nearly three years. Higher borrowing costs, which are tracking Treasury yields as the U.S.-Israeli war with Iran continues, are depressing home sales.

Softer demand is leaving homebuilders with excess inventory of unsold new homes, reducing incentives to break ground on new single-family housing projects. The housing market is also moving closer to the center of a wider affordability crisis ahead of the November 3 midterm elections, which will determine control of Congress.

The share of builders reporting price cuts to attract buyers jumps to 43% in October, the highest share during the 2020-2026 period. The average price reduction remains at 6% for the seventh straight month, while the use of sales incentives stands at 65%, marking the 19th consecutive month that at least 60% of builders offer them.

NAHB Chief Economist Robert Dietz says higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines. He says buyer traffic has fallen to its lowest level since April 2012, excluding the pandemic's onset in April 2020.

In our earlier article on surging U.S. Treasury yields and fiscal strain, we noted that long-term borrowing costs above 5% are feeding through to the economy by lifting mortgage rates and weighing on housing activity. The piece also explained how larger federal deficits and political gridlock can keep funding pressures elevated, reinforcing tighter financial conditions for households and builders alike.

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