U.S. homebuilders are feeling increasingly discouraged about the state of the American housing market, as higher mortgage rates and rising fuel prices keep demand low and new inventory stagnates, forcing them to slash prices and offer sales incentives. According to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence fell three points to 29 in October, the lowest level since June 2012, per NAHB. The survey also found that 43 percent of builders cut prices this month, the highest share during the 2020-2026 period, and that 65 percent of builders reported using sales incentives, marking the 19th straight month of at least 60 percent of builders having done so.
The past few years have been tough for U.S. homebuilders, especially in states like Florida and Texas, where a boom in new construction during the pandemic home-buying frenzy was followed by a dramatic cool down in demand when mortgage rates suddenly doubled in 2022. Much of the inventory added since the end of the health emergency has struggled to find a buyer, as Americans face higher costs across the board and growing economic uncertainty. This supply glut, which has impacted markets in the Sun Belt the most, has caused builders to offer discounts and all kinds of sales incentives to attract reluctant buyers.
As a result, new homes are now cheaper than old ones for the first time in recent years. According to a Zillow analysis released last month, new homes now sell for a median of $205 per square foot, less than the $212 median for old homes. An already bad situation—at least for homebuilders—got worse in recent weeks when mortgage rates started climbing again, driven by rising inflation and the Federal Reserve’s decision in September to raise interest rates for the first time in three years.
As of the week ending October 15, the national 30-year fixed-rate mortgage averaged 7.40 percent, according to Freddie Mac, up from 6.27 percent a year earlier. Builders are also facing higher costs for construction loans, building materials and diesel, according to Owens. Diesel prices, which have soared since the start of the Iran war in late February, are now at $6.32 per gallon nationwide, according to the American Automobile Association, nearly double what they were a year ago ($3.62).
Both tax-free “dyed” diesel and regular on-the road diesel are used to fuel the heavy machinery used for homebuilding, including excavators, loaders and bulldozers, and delivery and dump trucks that travel on public highways. The Trump administration’s efforts to lower the cost of diesel, including lifting restrictions on the use of “dyed” diesel on the road, “are helping to ease some of the cost pressures” builders face, according to Owens. But at the same time, the Trump administration’s crackdown on illegal immigration is disrupting the homebuilding sector, which relies heavily on immigrants.
Builders’ dwindling confidence is translating into a slowdown in new construction across the country, as shown by new data released by the U.S. Census Bureau on October 20. However, the relative resiliency of new home permitting shows that builders see these conditions as temporary.” Housing starts showed a different pattern, with multi-family projects posting a 7.2 percent decline from August and a 25.9 percent plunge from a year earlier, while single-family starts fell 4.6 percent month-over-month and rose 2.6 percent year-over-year.
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