Homebuilders Expect Sales To Improve in Coming Months Following Fed Rate Cut

Homebuilder sentiment rose this month to its highest level since April, as builders pinned their hopes on Federal Reserve rate cuts to revive the housing market.

Overall builder confidence in the market for newly built single-family homes was at 37 in October, up 5 points from September and the highest in six months, according to the National Association of Home Builders/Wells Fargo Housing Market Index released on Thursday.

The index measuring sales expectations over the next six months jumped 9 points to 54, the highest since January. Anything above 50 reflects positive sentiment about the market.

Following a tough year for builders, falling mortgage rates have revived their hopes, with average rates hovering near 6.3% for the past month and hitting their lowest levels of the year.

“While recent declines for mortgage rates are an encouraging sign for affordability conditions, the market remains challenging,” says NAHB Chairman Buddy Hughes. “The housing market has some areas with firm demand, including smaller builders shifting to remodeling and ongoing solid conditions for the luxury market. However, most homebuyers are still on the sidelines, waiting for mortgage rates to move lower.”

Mortgage rates began falling in late August in anticipation of the Fed's policy rate cut last month, and financial markets are currently pricing in two further rate cuts this year.

"Combined with anticipated further easing by the Fed, builders expect a slightly improving sales environment, albeit one in which persistent supply-side cost factors remain a challenge,” says NAHB Chief Economist Robert Dietz.

Builders, already grappling with high costs for materials and skilled labor, have expressed concerns about the impact of new tariffs on lumber and cabinetry imports that kicked in this week.

The tariffs, aimed at boosting U.S. timber production, include a 10% tariff on all timber and lumber imports and a higher 25% duty on cabinets and furniture. Those rates are set to jump higher on Jan. 1, rising to 30% for wooden furniture and 50% for kitchen cabinets and vanities. 

Even as they face higher costs, builders are still cutting prices to lure homebuyers in a tepid housing market.

In October, 38% of builders reported cutting prices, a share that has remained roughly steady since June. The average price reduction rose to 6% this month, after averaging 5% for several months previously.

As well, 65% of builders reported using sales incentives such as mortgage buydowns and closing cost assistance in October, unchanged from September.

On a regional basis, the Northeast index score rose 2 points to 46, the Midwest was unchanged at 42, the South increased 2 points to 31, and the West gained 2 points to 28.

The builder sentiment data takes on new significance this month as the government shutdown persists, blocking the release of regularly scheduled data on new-home construction that had been due out on Friday.

According to the economist Dietz, the October increase for the index suggests an approximate 3% increase for the September single-family permit totals on a seasonally adjusted annual rate basis.

A boost in permit applications would be welcome news for homebuyers, following a weak year for home construction that has failed to meet initial expectations.

In August, the latest available data, residential building permits fell to their lowest level since the onset of the COVID-19 pandemic, on a seasonally adjusted annual basis.

Permits have been falling steadily since March, as homebuilders have grappled with multiple headwinds, including rising materials costs, tariff uncertainty, elevated interest rates, and tepid demand from homebuyers.

The five-month streak marks the longest stretch of declining permit activity since late 2008, when the housing crash and Great Recession all but halted new building activity.