In April 2020, with most of America locked indoors, the country's home builders recorded their darkest mood in eight years.

Six years later, with no virus and no lockdown, they feel even worse.

The NAHB/Wells Fargo Housing Market Index (HMI), a monthly survey tracking builder confidence in the market for newly built single-family homes, fell three points to 29 in October.

That is the lowest reading since June 2012, below the 30 recorded in April 2020, and short of the 32 economists expected.

All three components of the main index fell.

Current sales conditions dropped two points to 33, sales expectations for the next six months slid five points to 32, and prospective buyer traffic plunged five points to 18.

The main trigger is the cost of money.

The 30-year fixed mortgage rate averaged 7.40% last week, the highest in nearly three years, according to Freddie Mac.

"Mortgage rates have climbed well above 7% in recent weeks, and higher gas prices and inflation have further weakened buyer traffic across much of the country," NAHB Chairman Bill Owens said.

Chart: Homebuilder Sentiment Sinks Below 2020 Lows, Hitting June 2012 Levels

Builders Are Paying To Keep Buyers

To keep sales moving, builders are giving up margin. In October, 43% of builders cut prices, the highest share during the 2020-2026 period, according to NAHB.

The average cut held at 6% for a seventh straight month.

Meanwhile, 65% of builders used sales incentives, such as mortgage rate buydowns.

It was the 19th straight month that at least 60% of builders have done so.

Labor is a second pressure point. More than one-third of builders reported immigration enforcement activity in their market areas in the past month, according to Owens, causing construction delays.

"Housing remains squeezed by supply-side constraints and significant affordability challenges," NAHB Chief Economist Robert Dietz said.

"Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines," he added.

Economists See Little Relief Ahead

Pantheon Macroeconomics' Oliver Allen said the typical 30-year mortgage rate has jumped to around 7.5%, from roughly 6.6% in early July.

He warned that "if anything—confidence is likely to fall much further over the next month or two, given the recent trends in rates."

Oxford Economics cut its forecasts for housing starts, home sales and home price growth on Monday.

"A median-income household now earns less than three-quarters of what it needs to afford a median-priced home, and the rise in rates this year alone has put homeownership out of reach for another 5 million households," Lead US Economist Nancy Vanden Houten said.

"We don't expect a meaningful improvement in housing activity until around the end of 2027, when we look for mortgage rates to decline," she added.

XHB/SPY: Back To Pandemic Levels

Wall Street has priced the slowdown in for months.

The SPDR S&P Homebuilders ETF (NYSE:XHB) relative to the SPDR S&P 500 ETF Trust (NYSE:SPY) traded at 0.1229 Monday.

That's slightly above last week's lows, but the ratio remains at levels last seen during the pandemic crisis.

On Oct. 14, it closed at 0.1206, its lowest level since April 2020.

At its late-September 2024 peak, the same ratio was close to 0.218. Builders have lost roughly 43% of their value relative to the S&P 500 in two years.

Over that stretch, XHB is down 24% while SPY has gained 34%.

This year, the homebuilder ETF is down almost 9% while the S&P 500 tracker is up nearly 12%.

Why Homebuilders Could Become An AI Hedge

One scenario could change that quickly, and it has little to do with housing.

22V Research analyst Dennis DeBusschere said in a Friday note that the artificial intelligence investment boom has crowded out housing.

"Real Private Residential Fixed investment has not contributed to GDP in 4 years as private fixed investment (AI capex) has accelerated," DeBusschere said.

In his view, consumer spending and AI capital spending have pushed U.S. growth well above trend. That has kept 10-year yields high, and high yields are what keep buyers away from new homes.

The logic also works in reverse.

Housing would contribute to economic growth if AI capex suddenly fell. The Fed would cut rates aggressively and 10-year yields would decline, DeBusschere said.

"Long Homebuilders is an interesting AI capex decline hedge," he added.