While easing mortgage rates and incremental affordability gains are offering some optimism for buyers, home builder sentiment suggests the construction industry is entering 2026 with far less confidence.

Builder sentiment declined again this month, falling from 39 in December to 37, according to the National Association of Home Builders’ (NAHB) latest Housing Market Index (HMI), which tracks conditions in the new-home market. Builders in the Northeast remain the most optimistic with an HMI reading of 45, followed by the Midwest at 43, while sentiment in the South and West lagged at 35.

Overall confidence is now at its lowest level since October — when the index also registered 37 — and has remained below the neutral 50-point threshold for nearly two consecutive years, underscoring prolonged caution among builders.

So what’s keeping sentiment depressed? Rising construction costs and persistent affordability challenges continue to weigh heavily on the industry, according to NAHB Chief Economist Robert Dietz.

“While the upper end of the housing market is holding steady, affordability conditions are taking a toll on the lower- and mid-priced segments,” Dietz wrote in commentary accompanying the January HMI release.

“Buyers remain concerned about high home prices and mortgage rates, with down payments particularly difficult given elevated price-to-income ratios,” he added.

Several additional headwinds remain in play. The HMI’s “future sales” component fell below 50 for the first time in several months, signaling that builders “continue to face issues including labor shortages, limited lot availability, and elevated regulatory and material costs,” according to Dietz.

Pricing pressure is also evident. Four in ten builders reported cutting prices in January. While that share was unchanged from November and December, it remains historically high for the NAHB survey and highlights the need for incentives to stimulate demand.

Builder pessimism may also reflect the housing market’s weak performance in the latter part of 2025. Although U.S. Census Bureau construction data for November and December have been delayed, October figures showed a notable slowdown in single-family housing starts and building permits.