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Illustration by Lanette Behiry/Real Estate News

Builder confidence slides as mortgage rates climb back to 7% 

After seven consecutive months of improving confidence, homebuilders were feeling less optimistic in August.

August 16, 2023
3 minutes

Key points:

  • The NAHB’s confidence index dropped by six points in August to 50.
  • In addition to steep mortgage rates, homebuilders continue to grapple with high labor costs and supply chain constraints.
  • More than half of the homebuilders surveyed said they were using concessions to improve sales, the report said. 

Despite a shortage of existing-home inventory and a rise in new construction in the last year, a new report from the National Association of Home Builders points to a shifting mood among builders. According to the organization, homebuilder confidence is starting to slide as mortgage rates return to 7%

The NAHB's Wells Fargo Housing Market Index dropped by six points in August to 50, the report said, representing the first drop after seven consecutive months of improving confidence. But it's not just high borrowing costs that are hampering homebuilders' efforts, NAHB Chairman Alicia Huey suggested in the report.

"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," Huey said. 

While the Fed's 11 rate hikes between March 2022 and July 2023 have helped to tame consumer inflation, higher wages for skilled labor and supply chain constraints are presenting major challenges to homebuilders this summer, the report indicated. Not only does this mean steeper costs to build, but those costs get passed on to consumers, Huey said. 

Buyer demand directed toward newly built homes

Even as costs rise, consumers are turning to new construction as inventory for existing homes remains tight.

"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 homeowners elect to stay put because they are locked in at a low mortgage rate," Huey said. 

To entice buyers, some homebuilders are offering concessions, including mortgage rate buydowns, while others are simply cutting prices. According to the report, 55% of homebuilders surveyed in August said that they were using incentives to help boost their new home sales. 

But a more permanent fix would be revising zoning constraints to new construction, NAHB Chief Economist Robert Dietz said. 

"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."

George Ratiu, chief economist at Keeping Current Matters, agreed.

"New homes are the critical key to a sustainable solution for today's housing affordability crisis. As a country, we welcomed the past decade's population growth and the economic boost it brought," Ratiu said. "However, we neglected the tangible infrastructure needs that the growth required and hid behind zoning regulations from another era when confronted with the reality of a massive housing shortage."

Single-family starts rose in August

Although confidence dipped, low inventory and existing demand did push single-family home construction higher in July, according to an Aug. 16 report from the U.S. Census Bureau. Overall housing starts rose 3.9% in July compared to a month earlier and were 5.9% higher than a year ago. 

Multifamily residential construction appears to be slowing down, decreasing 1.7% in July compared to a month earlier.

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