NAHB Chief Economist Robert Dietz expanded on these sentiments, explaining that the current housing market is defined by a collision between persistent underlying demand and a total collapse in affordability. “Housing remains squeezed by supply-side constraints and significant affordability challenges,” Dietz said. “Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines. As a result, buyer traffic has fallen to its lowest level since April 2012, excluding the pandemic’s onset in April 2020.”
The reference to 2012 is particularly telling. That era was defined by the slow recovery from the Great Recession and the subprime mortgage crisis. To see sentiment and traffic levels return to those depths suggests that the current era of "high for longer" interest rates is having a cooling effect on the market comparable to the aftermath of a global financial collapse.
The Rise of Price Cuts and Sales Incentives
As the market cools, builders are being forced to pivot their sales strategies to maintain volume and move inventory. The median sales price of newly built homes has dropped to a nearly five-year low, a direct result of builders attempting to find the "floor" of what today’s buyers can afford. To keep the wheels of commerce turning, discounting and the offering of sales incentives have shifted from being occasional tactics to becoming core components of the industry’s sales playbook.
In previous years, a builder might offer a small upgrade or a minor price reduction to close a deal in a slow-moving community. Today, however, the environment requires more aggressive intervention. For many operators, protecting profit margins now depends heavily on their "land basis"—the price at which they originally acquired the land—and their "spec strategy," which involves building homes without a pre-signed buyer in hopes of selling them quickly upon completion.
To bridge the gap created by 7% mortgage rates, builders are increasingly partnering with lenders to offer "rate buydowns." This practice involves the builder paying an upfront fee to the lender to lower the buyer’s interest rate for the first few years of the mortgage, or sometimes for the life of the loan. Additionally, support for closing costs has become a standard offering. For many buyers, these incentives are the only way to make their debt-to-income ratios work in the eyes of mortgage underwriters. Without these concessions, a significant portion of the remaining "qualified" walk-in traffic would be unable to secure financing.
Analyzing the HMI Components
The HMI is derived from a monthly survey that the NAHB has conducted for more than four decades. It asks builders to rate three key metrics: current single-family home sales, expectations for sales over the next six months, and the volume of prospective buyer traffic. Builders rate these components as “good,” “fair,” or “poor,” and the traffic component as “high to very high,” “average,” or “low to very low.”
In October, all three of these major components saw a decline, reflecting a broad-based erosion of confidence:
- Current Sales Conditions: This component dropped as builders reported fewer closed deals and a general slowdown in the pace of signings.
- Sales Expectations for the Next Six Months: This forward-looking metric fell sharply, indicating that builders do not anticipate a meaningful reprieve from high interest rates or inflationary pressures in the near term.
- Traffic of Prospective Buyers: This metric reached a historic low, underscoring the reality that many Americans have simply stopped looking for homes, deterred by the cost of entry.
The decline in these scores highlights a shift in the type of consumer remaining in the market. Builders report that the few people still visiting model homes are "payment-driven" shoppers—individuals who are less concerned with the total price of the home and more concerned with whether the monthly mortgage payment fits within their current cash flow. This shift has forced builders to become more like financial advisors, working closely with buyers to find creative ways to make the numbers work.
