Homebuilder Confidence Sinks Under Weight of High Interest Rates and Rising Material Costs

Following a brief May rebound, homebuilder sentiment slid in June as elevated mortgage rates, persistent affordability headwinds, and rising material costs continue to squeeze the industry.

Builder confidence in the market for newly built single-family homes registered at 35 in June, two points down from previous month, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released Monday.

The index rates builder confidence on a scale of 0 to 100. Any reading below 50 reflects negative sentiment about the market.

June marks the 14th consecutive month that sentiment has remained below 40, a streak not seen the foreclosure crisis of 2011-2012.

"With the nation short about 1.2 million homes, builder sentiment will remain soft until barriers are eased and conditions improve for home building," says NAHB Chairman Bill Owens. "Congress can help by passing the major housing package now before the Senate, along with the CONSTRUCTS Act to address the construction labor shortage and the Energy Choice Act to prevent state and local bans on natural gas in new homes."

Owens is referring to the 21st Century Road to Housing Act, a sweeping housing reform package that contains several provisions aimed at cutting through red tape and reducing the costs of home construction.

Meanwhile, the CONSTRUCTS Act, which stands for "Creating Opportunities for New Skills Training at Rural and Underserved Colleges and Trade Schools Act," is a bipartisan legislation aimed at increasing the pool of skilled residential construction workers.

The builder survey's index measuring current sales conditions decreased two points to 38 month over month, while the indexes tracking traffic of prospective buyers and sales expectations for the next six months held steady at 25 and 45, respectively.

Meanwhile, 35% of builders reported slashing prices in June, up from 32% in May. The average price cut was 6% in June, the same rate as the previous month.

The use of sales incentives was slightly more common in June than in May, ticking up from 61% to 62%., This marks the 15th straight month this share has reached 60% or higher.

"Costly and inefficient regulatory policy is clearly impeding the ability of builders to increase the housing supply," says NAHB Chief Economist Robert Dietz. "According to a new NAHB study, government regulation, taxes, fees and other costs add more than 26% to the price of an average single-family home."

All of this is playing out against the backdrop of the ongoing conflict in the Middle East that has been putting upward pressure on interest rates and fueling uncertainty in the housing market.

"Easing geopolitical tensions may allow mortgage rates to start falling again, further unlocking sidelined buyers who have been waiting to enter the new and existing home markets," Stephen Kates, a financial analyst at BankRate, tells Realtor.com®.

According to Dietz, easing permitting bottlenecks, density limits, and what he describes as inefficient zoning rules would help slash building costs and support the sorely needed housing growth.

Builder confidence varies significantly by region, with the Northeast housing index seeing the biggest month-over-month increase, climbing from 44 to 50 points.

The Midwest and the West kept steady at 45 and 27, respectively, while the South stood out as the only region to experience a downturn, with the local index dropping from 36 to 29 on the 100-point scale.

"The housing market’s strength depends heavily on location right now," notes Kates. "Metropolitan areas that continued building throughout the 2020s have rising inventories and flat or falling home prices. Strong post-pandemic buyer demand has waned under high mortgage rates and economic uncertainty."