Higher mortgage rates and ongoing supply challenges are just a few of the issues that the construction industry has been facing over the last few months.
August, 2023 saw the housing market hit a speed bump as mortgage rates climbed past 7% and helped cool demand for homes. This uptick had a noticeable impact on single-family home production, which saw an 11.3% drop in overall housing starts, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Multifamily production has also taken a hit.
The increase in mortgage rates means builder confidence has also slightly declined. For the first time in five months, sentiment levels have dropped below the 50-point mark. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reported that builder confidence in September, 2023 fell five points to 45, following a six-point drop on August, 2023.
The HMI uses “good”, “fair” and “poor” to gauge builder perceptions of current single-family home sales as well as sales expectations for the next six months. The survey also asks builders to rate traffic of prospective homebuyers as “high to very high,” “average,” or “low to very low.” Scores are used to determine a seasonally adjusted index; any number above 50 indicates that builders think the conditions are good than poor.
In September, all three major HMI indices posted declines. The HMI index gauging current sales conditions fell six points to 51, the component charting sales expectations in the next six months also declined six points to 49 and the gauge measuring traffic of prospective buyers dropped five points to 30.
These declines aligns with the rise in mortgage rates and the ongoing supply-side challenges.
One way that builders are adapting to this is by reducing home prices to boost sales, with 32% of builders reporting price cuts this month. Additionally, 59% of builders are offering various sales incentives as a way to attract buyers - more than any month since April 2023.
The HMI survey also revealed that 42% of new single-family home buyers in 2023 are first-time buyers. That’s a significant increase from a more normalized market in 2018 when they accounted for just 27%.
Builders are still facing supply challenges, including a shortage of construction workers, the number of buildable lots and distribution transformers, which is adding to affordability issues in the sector. The cost of insurance and the availability of it is also a growing concern.