Homebuilding executives remain pessimistic about the market overall as shrinking margins, increased incentives, high housing costs and economic uncertainty outweigh the benefits of moderating mortgage rates.
The National Association of Home Builders (NAHB)/Wells Fargo Builders’ confidence in the Housing Market Index (HMI) remained relatively flat, rising one point to 38 in November.
A score of 38 reflects negative sentiment and a year-on-year decline from 46, both of which are far from the 2022 peak value of 83.
Many builders report steady interest and traffic in their communities, but buyers remain on the sidelines, hoping that mortgage rates will be lower in 2026.
Recent headlines highlighting an increase in layoffs add another layer of uncertainty. A Challenger, Gray and Christmas report found that 153,074 job losses were announced in October, the highest monthly total in the fourth quarter since 2008.
“While lower mortgage rates are a positive development for affordability, many buyers remain hesitant due to the recent record-long government shutdown and concerns about job security and inflation,” said NAHB Chairman Buddy Hughes, a homebuilder and developer based in Lexington, NC.
The HMI survey found that 41% of builders reported cutting prices in November, a record high in the post-COVID era. The average price reduction was 6%, unchanged from November, and about two-thirds of builders reported taking advantage of sales incentives.
The HMI index for current sales conditions rose two points to 41, while the measure of expected sales fell three points to 51, and the indicator tracking potential buyer traffic rose one point to 26.
“We continue to see demand-side weakness as a weakening labor market and tight consumer finances contribute to a tough sales environment,” said NAHB chief economist Robert Dietz.
A deeper dive into builder confidence
A sharp decline in margins over the past year partly explains the current decline in homebuilder confidence. Here are some examples of year-over-year declines in gross profit margin, taken from the latest profit reports from government builders.
- DR Horton: 20%, lower than 23.6%.
- Lennar: 17.5%, lower than 22.5%.
- Tri Pointe Homes: 20.6%, down from 23.3%.
- Pulte Group: 26.2%, down from 28.8%.
- Smith Douglas Homes: 21%, lower than 26.5%
These shrinking margins reflect a harsh reality. Buyers, especially in the entry-level segment with little money, cannot afford homes at current prices. As a result, builders must use more generous incentives or lower prices to increase inventory. At the same time, construction and land costs remain high.
Looking ahead
Many homebuilding executives agree that any meaningful increase in homebuyer demand through 2026 will be tied to stronger consumer confidence and economic security.
A survey of private housebuilders from Wolfe research found that orders rose 0.6% month-over-month in October, but incentives rose 30 basis points. However, Wolfe Research analyst Trevor Allinson predicts that builders will begin opening new communities at market-clearing prices and ultimately rely less on incentives.
“Over the longer term, we believe this market price reset is healthy for consumer confidence, reducing buyers’ fears that they are purchasing a home with declining values,” he wrote.
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