• The NAHB/Wells Fargo Housing Market Index (HMI) held at 32 in September, just below the consensus estimate of 33.
  • Builders are increasingly turning to price cuts, with 39% reporting reductions—the highest level since the post-COVID period.
  • Despite the gloomy sentiment, the S&P Homebuilders Select Industry Index remains near record highs, highlighting a divergence between builder outlook and investor confidence.

Persistent Headwinds Dampen Builder Outlook

US homebuilder confidence remained mired in negative territory this month, with the key sentiment gauge unchanged at a low level as high mortgage rates and affordability challenges continue to restrain the market. The NAHB/Wells Fargo Housing Market Index registered 32 for September, missing economist expectations for a slight improvement to 33. A reading below 50 indicates that more builders view conditions as poor than good.

The index components painted a mixed but largely stagnant picture. While the gauge measuring sales expectations for the next six months edged up two points to 45, the component tracking buyer traffic dipped one point to a meager 21. The sub-index for current sales conditions held steady at 35.

Price Cuts Reach Post-Pandemic High

The persistent weakness has forced builders to become more aggressive with sales tactics. According to the survey, 39% of builders reported cutting home prices in September, marking the highest share since the post-COVID period and a significant increase from earlier this year. These price reductions have averaged approximately 5% each month since last November. Furthermore, 65% of builders offered sales incentives of some kind, a figure largely unchanged from August.

Efforts to reach the NAHB for additional comment on the September data were not immediately successful.

Market Sentiment Diverges from Equity Performance

The ongoing pressure on builders stands in stark contrast to the performance of homebuilding stocks, which have been a notable bright spot in the equity market. The S&P Homebuilders Select Industry Index has surged roughly 32% since June and continues to hover near all-time highs. This divergence suggests that investors are betting on the sector's long-term resilience and the ability of large, publicly-traded builders to adapt to the tough environment through cost controls, incentives, and a focus on constructing smaller, more affordable homes.

The HMI has now been below the 50-point threshold for well over a year, with sentiment in the low 30s reminiscent of levels last seen in late 2022. Without a meaningful decline in mortgage rates, which remain elevated due to Federal Reserve policy, a sharp rebound in builder optimism appears unlikely in the near term.