In a sign that the housing market is now slowing, builder confidence took a steep drop in May as growing affordability challenges in the form of rapidly rising interest rates, double-digit price increases for material costs and ongoing home price appreciation are taking a toll on buyer demand.
Builder confidence in the market for newly built single-family homes fell eight points to 69 in May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. This is the fifth straight month that builder sentiment has declined and the lowest reading since June 2020.
“Housing leads the business cycle and housing is slowing,” said NAHB Chairman Jerry Konter, a builder and developer from Savannah, Georgia. “The White House is finally getting the message and yesterday released an action plan to address rising housing costs that emphasizes a very important element long-advocated by NAHB – the need to build more homes to ease the nation’s housing affordability crisis.”
“The housing market is facing growing challenges,” said NAHB Chief Economist Robert Dietz. “Building material costs are up 19% from a year ago, in less than three months mortgage rates have surged to a 12-year high and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family. Entry-level and first-time home buyers are especially bearing the brunt of this rapid rise in mortgage rates.”
Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
All three HMI indices posted major losses in May. The HMI index gauging current sales conditions fell eight points to 78, the gauge measuring sales expectations in the next six months dropped 10 points to 63 and the component charting traffic of prospective buyers posted a nine-point decline to 52.
Looking at the three-month moving averages for regional HMI scores, the Northeast held steady at 72 while the Midwest dropped seven points to 62, the South fell two points to 80 and the West posted a six-point decline to 83.