US real estate market remains under pressure, builder confidence falls to lowest level in 14 years, over 40% of companies forced to lower prices for promotion

Zhitong Finance APP reported that due to persistently high mortgage rates above 7%, labor shortages, and elevated construction costs, confidence among U.S. homebuilders further deteriorated in October, dropping to its lowest level in 14 years. Meanwhile, weak homebuyer demand and high inventories of new homes have forced more builders to cut prices for promotions, further intensifying the pressures faced by the U.S. real estate market.

Data released on Monday by the National Association of Home Builders (NAHB) and Wells Fargo showed the U.S. homebuilder confidence index fell by 3 points in October to 29, marking the lowest level since June 2012 and coming in below the median economist forecast of 31 in a Bloomberg survey.

The threshold for this index is 50; a reading below 50 means that more builders view market conditions as poor rather than good. Notably, the U.S. homebuilder confidence index has been below 50 for more than two consecutive years, reflecting the ongoing severe challenges facing the real estate industry.

Breaking down the components, the index for current sales conditions fell to 33, also the lowest in 14 years. The index for sales expectations over the next six months—a core part of the overall confidence measure—dropped to its lowest level since November 2022. In addition, the potential buyer traffic index fell to its lowest since the early days of the COVID-19 outbreak, indicating further weakening market demand.

Sustained deterioration in builder confidence mainly reflects the growing problem of housing affordability in the U.S. Mortgage rates remaining above 7% have significantly increased buyers' monthly payments, causing many potential buyers to delay their home purchase plans. At the same time, labor shortages and persistently high construction material costs continue to drive up new home construction expenses, further limiting builders’ pricing power.

NAHB Chief Economist Robert Dietz stated in a Monday release that the U.S. housing market remains squeezed by supply-side constraints and severe affordability issues. He noted that while housing demand still exists, higher mortgage rates, persistently high building costs, and weakening consumer confidence are causing more potential buyers to take a wait-and-see approach.

Alongside weak demand, inventories of new homes in the U.S. remain high, further increasing sales pressure for builders. In order to attract buyers, more builders have had to resort to direct price cuts, offering buyer subsidies and other incentives, but these strategies are also eating into corporate profit margins.

The NAHB survey shows that in October, the proportion of builders reporting price reductions climbed to 43%, meaning over 40% of surveyed builders are stimulating sales through price cuts. Meanwhile, about two-thirds of builders said they implemented some form of sales incentive this month.

These incentives may help alleviate short-term sales pressure, but they also highlight the fierce competition in the current market and the profitability challenges builders face in a high-cost environment.

Regionally, builder confidence deteriorated across several major U.S. housing markets. In the South, builder confidence dropped to the lowest since mid-2012; the West saw a sharp decline of 10 points, its lowest level since late 2011. In addition, confidence in the Midwest decreased, while only the Northeast saw an improvement.

The weakness in the real estate sector is likewise reflected in the capital markets. The iShares U.S. Home Construction ETF (ITB.US), which tracks U.S. homebuilders and building material companies, has continued to decline over the past three months, indicating that investors remain pessimistic about the outlook for the real estate sector.

As elevated interest rates continue to suppress homebuyer demand, the market is closely watching whether U.S. housing construction activity will slow further. The federal government is scheduled to release new housing starts and building permit data on Tuesday, which will offer investors the latest clues on residential construction activity. Meanwhile, the National Association of Realtors (NAR) will also release last month's pending home sales data to reflect the latest changes in housing demand.