Stubbornly high mortgage rates further eroded home builders’ confidence in the new home market in October. Not only did the National Association of Home Builders (NAHB) report that the NAHB/Wells Fargo Housing Market Index (HMI) dropped 4 points this month, but the index for September was revised down an additional point. After its third consecutive monthly retreat, the HMI is now at 40, the lowest point since January 2023.

Robert Dietz, NAHB’s chief economist said builders are encountering dual issues. Buyers, particularly younger ones, are being priced out of the market by interest rates that have remained above 7 percent for two months.  Additionally, elevated rates are also increasing the cost and decreasing the availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

All three major HMI indices posted declines in October. The HMI index gauging current sales conditions fell 4 points to 46, the component charting sales expectations in the next six months dropped 5 points to 44 and the gauge measuring traffic of prospective buyers dipped 4 points to 26.

Dietz again called for increasing housing production to solve the affordability crisis. “[This] would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September and aid the Fed’s mission to bring inflation back down to 2 percent,” he said. “Uncertainty regarding monetary policy is contributing to affordability challenges in the market.”

Many builders continue to reduce home prices to boost sales. In October, 32 percent reported cutting home prices, unchanged from the previous month but still the highest since 35 percent was reported last December. The average price discount remains at 6 percent. Meanwhile, 62 percent of builders provided sales incentives of all forms in October, up from 59 percent in September and tied with the previous recent high set in December 2022.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell 4 points to 50, the Midwest dropped 3 points to 39, the South fell 5 points to 49 and the West posted a 6-point decline to 41.