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Housing pessimism spreads to homebuilders

The only ones that were optimistic about housing don't feel as upbeat anymore.

More homebuilders think housing conditions are poor versus good this month, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), with confidence retreating for the second straight month in September.

The index reading fell to 45 from 50 in August, dipping below the key break-even measure of 50 for the first time in five months and falling further than expected. Economists polled by Bloomberg anticipated an index reading of 49 for September.

The waning sentiment reflects the latest uptick in mortgage rates — which have stayed above 7% for five straight weeks, stifling affordability — plus escalating costs for construction materials and labor.

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"The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power," NAHB Chairman Alicia Huey, a custom homebuilder and developer from Birmingham, Ala., said in a statement.

"And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes. Insurance cost and availability is also a growing concern for the housing sector."

Mortgage rate shock

To blunt the mortgage rate shock, builders are pulling out the stops for buyers.

Nearly one-third (32%) of homebuilders reduced prices to boost sales in September, up from 25% in August and the largest share since December 2022, according to the NAHB. The average price discount remained at 6%.

And 59% builders offered some kind of incentive in September, more than any month since April 2023.

High prices and surging mortgage rates have hammered affordability. The average rate on the 30-year fixed mortgage remains stuck above 7%, according to Freddie Mac. Many buyers are priced out and have left the market.

Read more: What the latest Fed rate hike plan means for mortgage rates and loans

"High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," NAHB chief economist Robert Dietz said in a statement.

Nearly 60,000 home-purchase agreements were canceled nationwide in August, equal to 15.7% of homes that went under contract that month, according to a new report from Redfin, marking the highest rate in almost a year.

"I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate. They’re getting cold feet," said Jaime Moore, a Redfin Premier real estate agent in Reno, Nev.

"Buyers get sticker shock when they see their high rate on paper alongside extra expenses for maintenance, repairs, and closing costs."

Entry-level buyers

GILBERT, AZ -  (Photo by Justin Sullivan/Getty Images)
GILBERT, AZ - (Photo by Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

Builders had been riding high this year as the resale market suffers from historically low inventory, pushing more entry-level buyers to consider new construction.

The NAHB found that 42% of new single-family homebuyers year to date were first-timers. That is substantially higher than the 27% during a more normal market in 2018.

But these customers are also more rate- and price-sensitive because they don't come to the table with equity from a home sale. That's evident in how builders see the market going forward as rates exceed 7%.

The index measuring current sales conditions fell to 51 in September from 57 the month before, while the sales expectations for the next six months declined 6 points to 49 in September. And the gauge measuring traffic of prospective buyers dropped five points to 30.

"Putting into place policies that will allow builders to increase the housing supply is the best remedy to ease the nation’s housing affordability crisis and curb shelter inflation," Dietz said. "Shelter inflation posted a 7.3% year-over-year gain in August, compared to an overall 3.7% consumer inflation reading."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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