More builders slash home prices as confidence in the market falls to seven-month low

The numbers: Builder confidence fell for the third month in a row in July as elevated mortgage rates dampen home-buying activity.

Sentiment among builders is at the lowest level since December 2023.

Pessimism over the direction of sales of new homes pushed the National Association of Home Builders’ monthly confidence index down to 42 points in July, the industry group said on Tuesday.

The July figure fell short of economists’ expectations on Wall Street. 

A year ago, the index stood at 56. 

Key details: Builders continue to ramp up incentives and cut prices to keep buyers interested as mortgage rates stay near 7%.

Thirty-one percent of builders cut prices in July, the NAHB said, up from 29% in June. The average price cut was 6%. 

Sixty-one percent of builders were using sales incentives other than price cuts to improve sales in July.

The three gauges that underpin the overall builder-confidence index were mixed:

• Builders were gloomy about current sales conditions. That gauge fell by 1 point.
• Builders expect a drop in traffic from prospective buyers. That gauge fell by 1 point. 
• But they were relatively upbeat about future sales. That gauge rose by 1 point. 

Big picture: The homebuilding industry is feeling the toll of higher interest rates, and builders are cutting prices and offering incentives to keep buyers interested.

Buyers are not as keen to buy newly built homes as they were a year ago, due to elevated interest rates and the prospect of rates falling in the next few months, according to builders. Higher borrowing costs are also weighing on builders’ plans for new construction. 

Home buyers as well as builders are expecting mortgage rates to fall in the coming months. As economic data show weakness in the U.S. economy, the market expects the Federal Reserve to cut interest rates soon. 

What the NAHB said: “While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing,” Carl Harris, a Wichita, Kan.-based custom home builder and chair of the NAHB, said in a statement. 

And a persistent shortage of homes continues to be a tailwind for builders. “While home inventory is increasing, total market inventory remains lean at a 4.4 months’ supply, indicating a long-run need for more home construction,” said Robert Dietz, chief economist at the NAHB.