Homebuilder sentiment drops to lowest point in a year, but falling rates spur some optimism

High mortgage rates continue to weigh on the nation's homebuilders, leading to an increase in price cuts to lure buyers. But builders are cautiously optimistic about recent signs that interest rates may move lower soon.

Homebuilder sentiment fell six points to 34 in November on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Anything below 50 is considered negative. Analysts had expected the number to come in unchanged from October.

"The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market," NAHB Chair Alicia Huey said in the release. "Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory."

This marks the fourth straight month of declines. Sentiment is down 22 points since July and is now at the lowest level since the end of last year. The builders did note that nearly all of the monthly data for November was collected before the monthly consumer price index, released earlier this week, showed inflation moderating.

"While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months," Robert Dietz, NAHB's chief economist, said in the release.

"In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%," he said. "Given the lack of existing home inventory, somewhat lower mortgage rates will price in housing demand and likely set the stage for improved builder views of market conditions in December."

Of the index's three components, current sales conditions fell six points to 40, sales expectations in the next six months dropped five points to 39, and buyer traffic fell five points to 21.

More builders reported cutting prices in November – 36%, up from 32% in the previous two months. That is the highest share in this cycle tying the previous high two years ago. The average price cut was 6%.

NAHB forecasts a roughly 5% increase for single-family starts in 2024, "as financial conditions ease with improving inflation data in the months ahead," according to the release.