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It was bound to happen. Just as home builders began to feel more confident about attracting potential buyers, rising mortgage rates are proving too much for those customers.

After steadily rising for seven consecutive months, builder confidence retreated in August as rising mortgage rates nearing 7% (per Freddie Mac) and stubbornly high shelter inflation have further eroded housing affordability and put a damper on consumer demand.

Builder confidence in the market for newly built single-family homes in August fell six points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released August 15.

Home Builders Need Workers, Buildable Lots and Distribution Transformers

“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.

Huey said that other factors are helping support the demand for new construction.

“But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many homeowners elect to stay put because they are locked in at a low mortgage rate.”

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Housing Affordability Compared to US Median Income

Rising home prices and interest rates coupled with elevated construction costs, low existing inventory and solid demand resulted in a significant decline in housing affordability during the second quarter of 2023.

According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), 40.5% of new and existing homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $96,300.  This is down from 45.6% posted in the first quarter of this year, and the second-lowest reading since NAHB began tracking affordability on a consistent basis in 2012.

Where to Buy? Affordable Housing Markets Around the Country

The Housing Opportunity Index shows that the national median home price increased to $388,000 in the second quarter, up from $365,000 in the previous quarter. Meanwhile, average mortgage rates rose from 6.46% to 6.59% during this period.

The top five most affordable major housing markets in the second quarter of 2023 were:

  • Lansing-East Lansing, Mich.
  • Scranton-Wilkes-Barre, Pa.
  • Harrisburg-Carlisle, Pa.
  • Indianapolis-Carmel-Anderson, Ind.
  • Pittsburgh, Pa.

Top five least affordable major housing markets—all located in California:

  • Los Angeles-Long Beach-Glendale
  • Anaheim-Santa Ana-Irvine
  • San Diego-Chula Vista-Carlsbad
  • Oxnard-Thousand Oaks-Ventura
  • San Francisco-San Mateo-Redwood City

Meanwhile, Cumberland, Md.-W.Va., was rated the nation’s most affordable small market, with 95.5% of homes sold in the second quarter being affordable to families earning the median income of $89,900.

The top five least affordable small housing markets were also in the Golden State. Tied at the very bottom of the affordability chart were Salinas, Calif., and San Luis Obispo-Paso Robles, Calif., where 6.5% of all new and existing homes sold in the second quarter were affordable to families earning the area median income of $100,400 in Salinas and $113,100 in San Luis-Obispo-Paso Robles.

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NAHB Chief Economist Robert Deitz Calls for Government Action

Deitz said that government policies aimed at helping builders could help the housing shortfall. He said the shortfall is currently about 1.5 million housing units.

“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 striking 90% of the July Consumer Price Index reading of 3.2%,” said NAHB Chief Economist Robert Dietz. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.”

Builders Again Pressed Into Using Sales Incentives

The August HMI survey also revealed that rising mortgage rates are causing more builders to use sales incentives to attract home buyers.

After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August.

The average decline for builders reducing prices remained at 6%. And the share of builders using incentives to bolster sales was 55% in August, higher than in July (52%) but still lower than in December 2022 (62%).

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