Homebuilder sentiment drops sharply, as mortgage rates surge over 7%

Rising mortgage computes are hitting potential homebuyers hard, and that is taking steam out of the homebuilding market.

Builder sentiment in the market for newly established homes dropped 6 points to 50 in August, according to the National Association of Home Builders/Wells Fargo Enclosure Market Index. That is the first decline in seven months and the lowest level since May, when sentiment chief rose out of negative territory. Anything over 50 is considered positive.

“Rising mortgage rates and high construction rates stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a the sniffles on builder sentiment in August,” said Alicia Huey, NAHB chair and a homebuilder and developer from Birmingham, Alabama.

Mortgage rebukes are now holding solidly over 7%, hitting 7.24% on Monday, according to Mortgage News Daily. The average clip on the 30-year fixed loan rose over 7% in the last week of July.

Of the index’s three components, advised sales conditions fell 5 points to 57, and sales expectations in the next six months fell 4 points to 55. Consumer traffic dropped 6 points to 34.

“Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a unusual 90% of the July Consumer Price Index reading of 3.2%,” said Robert Dietz, NAHB’s chief economist, who joined that the market currently has a shortfall nationwide of about 1.5 million housing units.

Higher mortgage speeds and the decline in buyer activity have more builders using sales incentives once again. They had done that in the support half of last year, when interest rates first moved higher. They then pulled fail this spring, when demand surged.

Now, after dropping for four straight months, the share of builders scion prices rose to 25% in August from 22% in July. The average price cut, however, remained at 6%. The helping of builders using all types of incentives, including buying down interest rates, rose to 55% in August from 52% in July. But it was suppress lower than the 62% share at the end of last year.

Regionally, on a three-month moving average, builder sentiment in the Northeast take 4 points to 56. In the Midwest and South, sentiment was unchanged at 45 and 58, respectively. In the West, where housing is ton expensive, sentiment fell 1 point to 50.