Homebuilder Confidence Hits 2012 Low as Mortgage Rates Rise

The NAHB/Wells Fargo Housing Market Index fell three points to 29 in October. The monthly survey measures builder confidence in the market for newly built single-family homes. The reading was the lowest since June 2012 and below the 30 recorded in April 2020. Economists had expected a reading of 32.

All three index components fell. Current sales conditions dropped two points to 33. Sales expectations for the next six months declined five points to 32. Prospective buyer traffic fell five points to 18.

The main cause of the weakness is borrowing costs. Freddie Mac said the 30-year fixed mortgage rate averaged 7.40% last week, the highest in nearly three years. NAHB Chairman Bill Owens said mortgage rates above 7%, higher gas prices and inflation have further weakened buyer traffic across much of the country.

NAHB said 43% of builders cut prices in October to maintain sales, the highest share during the 2020-2026 period. The average price cut remained at 6% for a seventh consecutive month. Sales incentives, including mortgage rate buydowns, were used by 65% of builders. October marked the 19th consecutive month when at least 60% of builders used sales incentives.

Owens said more than one-third of builders reported immigration enforcement activity in the builders' market areas during the past month, causing construction delays. NAHB Chief Economist Robert Dietz said housing faces supply-side constraints and significant affordability challenges. Dietz said demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are deterring more buyers.

Pantheon Macroeconomics economist Oliver Allen said the typical 30-year mortgage rate has risen to around 7.5% from roughly 6.6% in early July. Allen warned that confidence is likely to fall much further over the next month or two, given recent rate trends. Oxford Economics cut forecasts for housing starts, home sales and home price growth on Monday. Oxford Economics Lead US Economist Nancy Vanden Houten said a median-income household earns less than three-quarters of the income needed to afford a median-priced home. Vanden Houten said this year's rate increases alone have put homeownership beyond the reach of another 5 million households. Vanden Houten expects no meaningful improvement in housing activity until around the end of 2027, when Oxford Economics expects mortgage rates to decline.

The ratio of the SPDR S&P Homebuilders ETF (XHB) to the SPDR S&P 500 ETF Trust (SPY) traded at 0.1229 on Monday. The ratio was slightly above last week's lows but remained at levels last seen during the pandemic crisis. The ratio closed at 0.1206 on October 14, the lowest since April 2020. The ratio peaked near 0.218 in late September 2024. Homebuilders have lost roughly 43% of their value relative to the S&P 500 in two years. XHB fell 24% over that period. SPY gained 34% over that period. XHB is down almost 9% this year. SPY is up nearly 12% this year.

However, 22V Research analyst Dennis DeBusschere said in a Friday note that homebuilders could provide a hedge against falling artificial intelligence capital spending. DeBusschere said the AI investment boom has crowded out housing. DeBusschere said real private residential fixed investment has not contributed to GDP in four years as private fixed investment associated with AI capital spending accelerated. DeBusschere argued that consumer spending and AI capital spending have pushed US growth well above trend, keeping 10-year yields high and deterring new-home buyers. DeBusschere said housing would contribute to economic growth if AI capital spending suddenly fell. DeBusschere said the Federal Reserve would cut rates aggressively and 10-year yields would decline in that scenario.