The National Association of Home Builders/Wells Fargo builder sentiment index released Wednesday fell to 55 in October. That's down from a reading of 57 in September. September's reading was revised one point lower from its initial estimate.
Measures of current sales conditions for single-family homes, builders' outlook over the next six months and traffic by prospective buyers all declined in October.
The partial government shutdown, which began on Oct. 1, has made it harder for some buyers to close on their mortgages, raising concerns that a prolonged shutdown could undercut the strength of the housing recovery. The survey was conducted from Oct. 1 through Oct. 11.
Still, builders remain optimistic that the recovery will endure. Any reading above 50 indicates more builders view sales conditions as good, rather than poor.
"Once this government impasse is resolved, we expect builder and consumer optimism will bounce back," said David Crowe, the NAHB's chief economist.
The association estimates that builders broke ground on single-family homes in September at a seasonally adjusted annual rate between 620,000 and 630,000 homes last month, in line with the August pace of 628,000. Official estimates from the U.S. Census haven't been released because of the government shutdown.
"Single-family starts dipped in July but rebounded in August, and we expect continued strength in September," Crowe said.
Builders' confidence in the market for newly built homes has improved steadily since national measures of home sales and prices began to recover early last year.
But some builders reported a slowdown in sales this summer as mortgage interest rates began to tick up in May, stoking worries that rising rates could hinder the housing recovery.
Rates began to increase after Federal Reserve Chairman Ben Bernanke signalled the central bank might reduce its $85-billion-a-month in bond purchases. The bond buys are intended to keep longer-term interest rates low, including mortgage rates.
But the Fed held off last month, and since then mortgage rates have moved lower.
Last week, the average rate on a 30-year loan edged up to 4.23 per cent from 4.22 per cent a week earlier, according to mortgage buyer Freddie Mac. Those are both the lowest averages since July.
Now, the partial government shutdown and uncertainty over a possible U.S. debt default are weighing most on builders' confidence.
Furloughs at the Federal Housing Administration are slowing the agency's processing of loan guarantees for some low- to moderate-income borrowers and first-time homebuyers. About 30 per cent of U.S. home mortgages are insured by the FHA. And some lenders are having a hard time getting confirmation of applicants' income tax returns and Social Security data because of government agency closures, delaying some mortgage closings.
In addition to the uncertainty over the federal government's budget battle, the survey also highlighted concerns over the cost and availability of construction labour.
The latest survey, which is based on 261 respondents, a measure of current sales conditions for single-family homes fell two points to 58, while a gauge of traffic by prospective buyers dipped two points to 44. Builders' outlook for single-family home sales over the next six months also slid two points to 62.
Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the homebuilders association.