Higher mortgage interest rates putting a scare in homebuilders

Filed in archive mortgage news on June 16, 2009

Home builders are a nervous lot these days. Who can blame them? Ever since the housing slump began, they've been going out of business or declaring bankruptcy in record numbers.

It's no surprise, then, that home builders are spooked rather easily these days.

Today it's higher mortgage interest rates that are giving builders the willies. A story in the Wall Street Journal pointed to rising interest rates as being the reason that builders' confidence dropped significantly in the beginning of this month.

The National Association of Home Builders charts the confidence levels of their home-builder members every month. Basically, they ask members how confident they are that sales of newly built homes will be strong.

In June, builders had little confidence that the sale of new homes will do well.

Builders pointed to the rising mortgage interest rates. This makes sense: New homes generally cost more than do existing homes. When mortgage interest rates are low, it's easier for potential buyers to purchase newly built home; their monthly mortgage payments will be lower.

When interest rates are high, though, these same monthly payments will be higher.

High mortgage interest rates, then, have the effect of shrinking the pool of available buyers for new homes.

No wonder home builders are so edgy. First they had to deal with a surplus of inventory, homes that most buyers could no longer afford once the housing slump hit and home values plummeted. Now rising mortgage interest rates threaten to reduce the buying power of these builders' top customers.

It's not easy being a home builder these days.