Homebuilder confidence ticks up but remains low

Homebuilding executives remain downbeat, citing a range of current conditions marked by buyer hesitancy, economic uncertainty, shrinking profit margins, increased use of incentives, and high costs.

However, homebuilders whose primary focus is the strained entry-level buyer segment face the biggest hurdles. 

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)’s builder confidence gauge remained range-bound at a below-par level, rising one point to 39 in December. The negative score represents a year-over-year decline from 46 in December 2024. 

NAHB’s report finds that 40% of builders cut prices in December, with an average reduction of 5%. Meanwhile, homebuilders’ use of sales incentives crested at 67%, the highest percentage recorded in the post-COVID era. 

“Market conditions remain challenging with two-thirds of builders reporting they are offering incentives to move buyers off the fence,” said NAHB Chairman Buddy Hughes, in a press release. “Meanwhile, builders are contending with rising material and labor prices, as tariffs are having serious repercussions on construction costs.”

Despite broadly weak results, builder confidence inched higher for the third consecutive month, fueled by a brighter outlook for some time in 2026. As of December, NAHB’s index is up seven points from the year’s lowest reading of 32 in June, August, and September. 

The Fed’s rate cut of 25 basis points last week also delivered a glimmer of good news. Current sales conditions increased one point from November to 42, and sales expectations over the next six months rose one point to 52, indicating that more homebuilding company survey respondents share a confident outlook than a negative one.

“In positive signs for the market, builders report that future sales expectations have been above the key breakeven level of 50 for the past three months, and the recent easing of monetary policy should help builder loan conditions at the start of 2026,” NAHB Chief Economist Robert Dietz said in a press release. 

Economic uncertainty hampers homebuyer demand

Public homebuilding executives commonly cite economic uncertainty and low consumer confidence as major reasons for lagging homebuyer demand. ADP’s November employment report concluded that the private sector lost 32,000 jobs in November, only heightening some people’s concerns about the economy.

At the same time, OECD’s consumer confidence index is at 98.44 as of November, lower than the long-term average of 100.

“I think consumer confidence is uncertain at best, and confidence is something difficult to solve with a lower price or higher incentive. [Buyers] just need the value equation to work and to have confidence in their financial circumstances to feel more secure,” PulteGroup’s President & CEO Ryan Marshall said during a Q2 2025 earnings call in July.

Entry-level buyers feel the squeeze

Toll Brothers, a luxury homebuilder with an average sales price of nearly $1 million, is performing relatively well amid an environment where the top 10 to 20 percent of Americans are doing very well economically.

However, younger Americans and entry-level buyers are increasingly cash-strapped, leaving many builders that specialize in lower-cost segments struggling and forced to pivot.

Beazer Homes and Hovnanian Enterprises, for example, both announced on their most recent earnings calls that they would shift some of their focus away from entry-level, more affordable communities in favor of those in the move-up segment in the quarters ahead. This is because entry-level homes often require too many incentives to sell and offer tight margins.

Geographic divides

Homebuilder sentiment was the highest in the northeast, at 47, and the Midwest, at 43. The South (36) and the West (34) — areas typically the most active for new home development and construction — were much lower.

While the report didn’t expand on these geographic divides, the lower sentiment in the South and West can partially be attributed to a glut of new supply, especially among entry-level and first-time homebuyer segments that are especially sensitive to higher-for-longer interest rates and stubbornly high new home prices. This oversupply of new homes in states such as Texas and Florida has forced builders to reduce prices and employ more incentives to sell homes. 

A recent Realtor.com report projected that home prices will rise 2.2% nationally in 2026, but there are geographic differences. The top ten U.S. metros where price growth is expected to drop the most next year are in the South and the West, led by Florida with four and Northern California with three.