Weakening Housing Demand Drives Builders to Slash Prices
The latest data from the National Association of Home Builders (NAHB) highlights a concerning trend in the housing market as builders grapple with dwindling demand. In July, builder confidence ticked up by a modest point to 33 on the NAHB index. However, anything below 50 reflects negative sentiment, and this index has lingered in the negative zone for 15 consecutive months. Last July, builder confidence stood at 41.
This slight uptick in July can be attributed to the recently enacted budget act, which aims to alleviate some financial pressures on households, builders, and small businesses. Yet, persistent elevated mortgage rates have undermined market stability, remaining largely unchanged for several months. Buddy Hughes, NAHB chairman and a builder from Lexington, North Carolina, summarized the situation succinctly: “While this new law should provide economic momentum, the housing sector has weakened significantly in 2025 due to poor affordability conditions.”
Significant Price Cuts as Builders Respond to Market Conditions
The market’s fragility is underscored by a sharp rise in price reductions among builders. In July, 38% of builders reported cutting prices—the highest proportion recorded since tracking began in 2022. This figure represents a marked increase from 29% in April, suggesting an urgent need to attract buyers. On average, price reductions hovered around 5%, a figure that has remained constant since November.
Builders have increasingly opted to buy down mortgage rates to entice potential buyers. While this strategy offers some relief, it has also squeezed profit margins. Financial analysts caution that if builders resort to more aggressive price cuts, they risk greater negative impacts on gross margins and earnings per share. Jonathan Woloshin, a real estate analyst at UBS, noted, “Should the public builders supplement mortgage rate buydowns with more outright price reductions, they would likely experience a larger negative gross margin.”
The NAHB index’s components illustrate varying trends: current sales conditions experienced a slight rise to 36, while sales expectations for the next six months improved by three points to 43. However, buyer traffic saw a decline to 20, representing the lowest level since late 2022. This decline is troubling, suggesting that even with improvements in sales conditions, the appetite for new homes remains tepid.
Regional disparities are evident in builder sentiment as well. The Northeast reported the strongest sentiment, with a two-point increase, while the Midwest remained unchanged. Conversely, builder sentiment weakened further in the South and West, underscoring notable regional economic differences.
As potential buyers navigate these shifting market dynamics, the challenges facing the single-family housing sector are evident. Robert Dietz, NAHB’s chief economist, has projected a decline in single-family housing starts in 2025 due to ongoing affordability issues. With single-family permits down 6% year-to-date and builder traffic at a two-year low, the landscape for homebuilders remains precarious.