Homebuilders Hope a Fed Rate Cut Will Revive Market as Their Reliance on Price Cuts Deepens

Homebuilder sentiment remained dour this month as their reliance on price cuts increased, leaving many hoping a Federal Reserve rate cut this week will revive the housing market.

In September, 39% of builders reported cutting prices, up from 37% the prior month and the highest percentage in more than five years, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on Tuesday.

The average price reduction reported by homebuilders was 5% this month, where it has held steady since November.

Overall builder confidence in the current market for newly built, single-family homes remained low in September at a reading of 32, unchanged from August. Anything below 50 reflects negative homebuilder sentiment about the market.

However, when asked about their outlook on the market in the coming months, builders expressed optimism that a more favorable interest rate climate could bring hesitant buyers off the sidelines in the final quarter of 2025.

The HMI index gauging future sales expectations in September rose two points to 45, the highest reading since March of this year.

“While builders continue to contend with rising construction costs, a recent drop in mortgage interest rates over the past month should help spur housing demand,” says NAHB Chairman Buddy Hughes. 

Mortgage rates have been falling in recent weeks in anticipation that the Fed will cut its benchmark overnight interest rate on Wednesday, marking the central bank's first rate cut in nine months.

Average rates on 30-year fixed home loans dropped to 6.35% last week, an 11-month low, according to Freddie Mac.

"This is the lowest level since mid-October of last year and a positive sign for future housing demand," NAHB Chief Economist Robert Dietz says of the latest mortgage rate average.

In addition to the recent easing in mortgage rates, a lower Fed rate will help lower borrowing costs for homebuilder and developer loans, says Dietz.

Meanwhile, homebuilders have struggled in the face of weak buyer demand, using price cuts and incentives such as rate buydowns to attract buyers. In September, 65% of builders reported using sales incentives, essentially unchanged from 66% in August.

Since April, median sales prices for new homes have actually been lower than those of existing homes, inverting a longstanding trend.

Slump in single-family permits highlights challenges for builders

Over the first seven months of 2025, the total number of single-family permits issued nationwide totaled 565,208, down 5.7% from the same period last year, according to a recent NAHB analysis.

Multifamily permits, which are more volatile, did tick up by 2.5% annually over the same period, but that was not enough to pull the overall permit figure out of its year-over-year decline.

Moody's Chief Economist Mark Zandi recently highlighted the pullback in residential building permits in a post on X, calling it "the most critical economic variable for predicting U.S. recessions."

Zandi noted that while permits had been holding up reasonably well, as builders supported sales through interest rate buydowns and other incentives, inventories of unsold homes are now high and on the rise.

"In response, builders are pulling back, and permits have started to slump. They are now as low as they’ve been since the pandemic shutdowns," he wrote.

New residential permit data for August will be released Wednesday morning, shedding further light on how building activity is responding to market conditions.

The Fed will issue its new interest rate policy at 2 p.m. Wednesday. Financial markets estimate a 96% probability that the Fed will lower its benchmark rate by a quarter percentage point, according to the CME Group's FedWatch tool.