Homebuilders are feeling worse about the housing market as persistently high mortgage rates curtail new home sales.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index fell 1 point to 42 in July from the previous month, marking the lowest level since December. July's reading was lower than economists’ estimates of 43, per Bloomberg data.
Any number under 50 indicates that more builders view conditions as poor versus good.
A high cost of borrowing has kept both potential buyers and sellers on the sidelines. New-home sales hit a six-month low in May, according to the latest data available from the Census Bureau.
Mortgage rates have hovered around 7% this year. The national average on the 30-year fixed-rate mortgage fell to 6.89% last week from 6.95% a week prior, Freddie Mac reported.
There are signs, though, that inflation is easing, making it more likely the Federal Reserve will cut interest rates sooner rather than later. According to data released last week, the Consumer Price Index for June declined 0.1% over the previous month and increased just 3% over the prior year — a deceleration from May's flat month-over-month change and 3.3% annual gain in prices.
As of Tuesday, markets were widely betting on a September rate cut.
“Though inflation is still above the Federal Reserve’s target of 2%, it appears to be back on a cooling trend. NAHB is forecasting Fed rate reductions to begin at the end of this year, and this action will lower interest rates for home buyers, builders and developers,” NAHB chief economist Robert Dietz said in a press release. “And while home inventory is increasing, total market inventory remains lean at a 4.4 months’ supply, indicating a long-run need for more home construction.”
Indeed, a measure of sales expectations in the next six months was a positive note in the latest print: It increased 1 point to 48.
The combination of higher mortgage rates and high home prices has pushed builders to lower home prices and offer incentives to buyers, such as mortgage rate buydowns. According to NAHB data, 31% of builders cut home prices to bolster sales in July compared to 29% in June.
The average price reduction held steady at 6% for the 13th consecutive month. The share of builders using sales incentives also remained the same at 61% in July, the NAHB report said.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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