Home Builder Confidence Falls to 37 in January, Marking 21st Consecutive Month in Negative Territory

Home builder confidence declined for the second consecutive month in January, with the National Association of Home Builders/Wells Fargo Housing Market Index falling two points to 37. The reading marks the 21st consecutive month that builder sentiment has remained in negative territory—below the neutral threshold of 50—underscoring persistent challenges facing the residential construction industry.

All Three Components Decline

The January survey revealed weakness across all three components of the index. Current sales conditions fell one point to 41, while traffic of prospective buyers dropped three points to 23. Perhaps most concerning, the gauge measuring future sales expectations declined three points to 49, slipping below the breakeven point of 50 for the first time since September.

The decline in forward-looking expectations suggests that builders see little relief on the horizon, despite recent improvements in mortgage rates and what some analysts had predicted would be a more favorable 2026 housing environment.

"While the upper end of the housing market is holding steady, affordability conditions are taking a toll on the lower and mid-range sectors. Buyers are concerned about high home prices and mortgage rates, with downpayments particularly challenging given elevated price-to-income ratios."

— Buddy Hughes, NAHB Chairman

A Bright Spot: Mortgage Rates Hit Three-Year Lows

The survey did offer one encouraging development. NAHB Chief Economist Robert Dietz highlighted that Freddie Mac reported the average 30-year fixed mortgage rate fell to 6.06% as of January 15—the lowest level in three years and nearly 100 basis points below the same period last year.

The decline in mortgage rates reflects broader easing in financial conditions as the Federal Reserve has cut interest rates 75 basis points since September 2025. However, the rate improvement has yet to translate into meaningfully stronger housing demand, suggesting that elevated home prices remain the primary barrier to affordability.

Housing Affordability Math:

• Median Home Price (December 2025): $407,500
• 30-Year Mortgage Rate: 6.06%
• Monthly Payment (20% Down): $1,965
• Income Needed to Qualify: Approximately $94,000

For many first-time buyers, the combination of elevated prices and still-high rates means monthly payments consume an outsized share of household income. The typical American household earns approximately $80,000 annually, creating a significant gap between income and the earnings needed to qualify for a median-priced home.

Geographic Disparities Emerge

The January survey revealed meaningful regional differences in builder sentiment. The Northeast and Midwest showed relative stability, while builders in the South and West reported more pronounced declines. Western markets, in particular, continue to grapple with affordability challenges as home prices in states like California and Colorado remain well above national averages.

The regional divergence mirrors broader trends in the housing market, where markets with lower price-to-income ratios have shown greater resilience while expensive coastal markets struggle to attract buyers.

The Incentive Economy Continues

To move inventory and attract buyers, builders continue to rely heavily on incentives. According to the survey, 62% of builders offered some form of sales incentive in January, including price cuts, mortgage rate buydowns, and closing cost assistance. The widespread use of incentives has been a hallmark of the housing market since mid-2023, when rising rates first began to significantly impact demand.

Mortgage rate buydowns have proven particularly popular, with many builders offering to reduce buyers' rates by 1-2 percentage points in exchange for a higher purchase price. While these arrangements can make monthly payments more manageable, they effectively transfer interest rate risk from buyers to builders—a trade-off that has compressed profit margins across the industry.

New Construction's Role in the Market

Despite builder pessimism, new construction continues to play an outsized role in the housing market. With existing home inventory constrained by the "lock-in effect"—homeowners reluctant to sell and give up their low-rate mortgages—new construction represents a significant share of available homes for sale.

In many markets, newly built homes now account for one-third or more of active listings, compared to a historical average of around 10-15%. This dynamic has provided some support for builder activity even as sentiment remains depressed, though it has also intensified competition and pressured margins.

What Needs to Change

For builder sentiment to sustainably improve, economists say one of two things must occur: either mortgage rates need to fall significantly further—likely below 5.5%—or home prices need to correct meaningfully. Neither outcome appears imminent.

The Federal Reserve is expected to proceed cautiously with rate cuts in 2026, with most economists projecting just two or three additional reductions this year. Meanwhile, limited existing home inventory continues to support home prices, preventing the kind of correction that would meaningfully improve affordability.

Investment Implications

For investors, the January NAHB report reinforces the challenging environment facing homebuilders. While builder stocks have rallied significantly from their 2023 lows, the path to further gains likely depends on a more favorable interest rate environment or evidence of margin stabilization.

Builders with strong balance sheets, geographic diversification, and efficient cost structures remain best positioned to navigate the current environment. However, investors should temper expectations for a sharp housing recovery in the near term, as affordability challenges appear likely to persist through at least the first half of 2026.