A row of homes under construction in a new development.

Builder confidence declines even as home starts rise 

Rising mortgage rates have hit the construction sector hard, pushing confidence to the lowest level since January despite an uptick in housing starts.

Updated October 18, 2023
3 minutes

Key points:

  • The National Association of Home Builders confidence index dipped for a third consecutive month in September after peaking in July.
  • Housing starts and completions ticked up in September, but those gains do not appear to be improving builders’ outlook.
  • Elevated interest rates are making it harder to get construction loans, and lower demand has resulted in more price cuts and incentives.

Builder confidence continues to drop across the U.S., which does not bode well for a housing market already struggling with historically low inventory.

The October index from the National Association of Home Builders fell to 40, a four-point decline from September and the lowest level since January, even as new home starts and completions picked up.

According to the latest report from the U.S. Census Bureau, 1.36 million new residences — including single-family homes and multifamily units — started construction in September. That was a 7% increase from August's seasonally adjusted rate of 1.28 million starts, which was the lowest figure in more than three years.

Completions also increased, rising 6.6% month-over-month, with 1.45 million new housing units delivered in September. 

But the gains do not appear to be relieving builder concerns. "Despite the uptick last month, home builders are becoming increasingly anxious about persistently high mortgage rates and cooling demand," said Lisa Sturtevant, chief economist for Bright MLS. 

Along with tempering demand, the rise in mortgage interest rates has made construction loans harder to obtain and is causing builders to reduce home prices to boost sales, said Robert Dietz, NAHB's chief economist.

According to the October survey, 32% of builders said they cut prices, consistent with the September survey. Those two months represent the highest percentage of price reductions all year.

"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, Alabama.

In addition to price cuts, a majority (62%) of builders are offering sales incentives, which is also the highest level reported since December 2022.

"To keep buyers interested, many builders have been offering upgrades or buying down mortgage rates," noted Sturtevant.

Dietz said adding more supply is the best way forward, not only for the housing market, but for the economy as a whole.

"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%," Dietz said. "However, uncertainty regarding monetary policy is contributing to affordability challenges in the market."

Looking at regional three-month averages, the builder confidence index in the Northeast fell four points to 50, the Midwest dropped three points to 39, the South fell five points to 49 and the West was down six points to 41, according to the survey.

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