• Homebuilder sentiment dipped into negative territory this month for the first time since April.

• The marked decline comes as the average mortgage rate lingers above 7%. 

• "High mortgage rates are clearly taking a toll on builder confidence and consumer demand," NAHB's chief economist said.

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US homebuilders are feeling less confident about the housing market as the average mortgage rate continues to linger above 7% and box out prospective buyers.

That's according to the National Association of Home Builders sentiment index, which for the month of September dipped into negative territory for the first time since April. The index dropped five points to 45, following a six-point drop in August. Any reading below 50 represents a negative outlook for the housing market.

"The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power," NAHB Chair Alicia Huey said.

Homebuilders are having a difficult time building more houses due to shortages of construction workers and buildable lots, according to Huey. Rising home insurance costs and the lack of insurance availability in some regions like Florida are also not helping the situation.

The NAHB sentiment index peaked at 90 in November 2020, when home prices were surging. But then it trended lower with its decline accelerating throughout 2022 as the Federal Reserve began to aggressively hike interest rates, which sent mortgage rates higher.

Those borrowing costs are holding down the housing market because home affordability has declined significantly, boxing out a lot of would-be buyers.

"High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," NAHB chief economist Robert Dietz said.

Households most impacted by high borrowing costs are most likely to wait before purchasing a home, LPL Financial chief economist Jeffrey Roach told Insider via e-mail.

In August, about 16% of home sale deals were canceled, representing the highest rate in nearly a year. In a bid to boost sales, 32% of homebuilders cut prices in September, up for 25% in August.

"The environment could be a good opportunity for new homebuilders if companies can provide enticing incentives," Roach said.

The NAHB sentiment index is widely followed because in the past it was a leading indicator of a potential recession (highlighted in gray in the chart below). The index plunged a full year before the start of the 2008 recession.