US home builder sentiment ticks up in August but remains weak overall

The U.S. home builder sentiment index unexpectedly increased in August, according to a survey released on Monday, although the overall confidence among residential construction firms remains low. The National Association of Home Builders/Wells Fargo Housing Market index rose by one point to a reading of 35, up from July's unrevised level of 34.

Economists polled by Reuters had predicted the index to decline for the third consecutive month to 33. The subindex measuring current sales of single-family homes increased to 39, the highest since May, while predictions of future sales and foot traffic from prospective buyers remained unchanged.

Geographically, sentiment improved in the Northeast, South, and West regions and remained static in the Midwest. This marked the 16th month in a row that the index remained below 40, the longest such period since 2012. No index had fallen below the 50 level, which signifies positive business conditions, for more than two years. Despite the slight uptick, NAHB Chairman Bill Owens noted that the index continues to be weak due to economic uncertainty, high mortgage rates, and escalating building costs exacerbated by the U.S.-led war with Iran.

The cost of gasoline and diesel fuel has significantly risen, driven by disruptions in global energy markets due to the Iran war. Gasoline prices, averaging $4 a gallon, are roughly 30% higher than this time last year, while diesel fuel, which powers construction vehicles and equipment, is at $5.45 a gallon, about 50% higher than last August. The residential real estate market is grappling with high mortgage interest rates and a shortage of homes available for sale, impacting affordability and sales rates.

Mortgage rates, the most common U.S. home loan, had decreased slightly in the week ending August 7 for the first time since mid-June, according to the Mortgage Bankers Association, but remained near the highest in over a year at 6.77%. Many builders of new homes are employing price cuts and incentives to boost sales in the face of these challenges.

Notably, 16% of builders reported price reductions in August, with an average reduction of 6%, unchanged from the previous month. Nearly two-thirds of builders offered some form of sales incentive.