November 2023 Homebuilder Sentiment Drops Amid High Mortgage Rates, But Inflation Data Sparks Hope

Key Highlights

• In November 2023, the NAHB/Wells Fargo Housing Market Index (HMI) declined to 34, falling short of economist predictions.
• This marks the fourth straight month of declining builder sentiment.
• NAHB economists forecast mortgage rates easing to around 7.5%, anticipating a 5% rise in single-family home starts in 2024.
• High mortgage rates led 36% of builders to reduce home prices in November, the highest percentage in a year.

Mortgage interest rates remain near two-decade highs, continuing to weigh heavily on homebuilder confidence.

The NAHB/Wells Fargo Housing Market Index dropped for the fourth consecutive month in November 2023, reaching levels unseen since December 2022. However, most data was collected before recent favorable inflation trends emerged.

NAHB Chief Economist Robert Dietz commented, "Although builder sentiment declined in November, recent macroeconomic indicators signal improved prospects for home construction in the near future."

The November HMI reading of 34 was below the expected 40, representing a 22-point decrease since July and far below the 83 recorded in November 2021.

The decline in builder confidence is closely linked to mortgage rate peaks experienced in August, the highest in 22 years.

NAHB Chair Alicia Huey noted, "Rising interest rates since late August have dampened builders' outlook as many potential buyers are now priced out of the market."

In response, 36% of homebuilders reported reducing home prices in November—up from 32% in previous months—with an average price cut of 6% to stimulate sales.

Additionally, elevated financing costs for builders and land developers add pressure to a housing market already constrained by limited supply.

Encouragingly, recent Consumer Price and Producer Price Index reports revealed inflation rates lower than anticipated, potentially prompting the Federal Reserve to pause or reduce interest rates.

With easing inflation, NAHB projects a 5% increase in single-family housing starts in 2024, driven by improved financial conditions.

Dietz added, "Given the shortage of existing homes and moderately lower mortgage rates, housing demand is expected to strengthen, setting a positive tone for builder sentiment in December."

Correction—Nov. 16, 2023: Economists now project the 5% growth in single-family housing starts for 2024, not 2023 as previously stated.

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