As per data from Freddie Mac, mortgage rates have been averaging above 7% for the past four weeks, resulting in a decline in builder sentiment for the first time since November 2023. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) revealed that builder confidence in the market for newly built single-family homes was 45 in May, down six points from April.
NAHB Chairman Carl Harris stated, “The market has slowed down since mortgage rates increased and this has pushed many potential buyers back to the sidelines.” He also expressed concern about recent codes rules requiring HUD and USDA to insure mortgages for new single-family homes only if they adhere to the 2021 International Energy Conservation Code. According to Harris, these rules will further increase construction costs in a market that urgently needs more inventory for first-time and first-generation buyers.
Robert Dietz, NAHB Chief Economist, commented on how lack of progress on reducing inflation is pushing long-term interest rates higher and acting as a drag on builder sentiment. He emphasized that reducing shelter inflation is crucial to combat overall inflation and this can only be achieved if builders construct more affordable housing.
The May HMI survey also found that 25% of builders reduced home prices to boost sales in May, marking an end to four months of consecutive declines in this metric. However, the average price reduction remained steady at 6% for the eleventh consecutive month. Additionally, use of sales incentives rose slightly to 59% in May from 57% in April.
The NAHB/Wells Fargo HMI is derived from a monthly survey conducted by NAHB for over three decades. It measures builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also gauges traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are 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 component indices posted declines in May. The HMI index charting current sales conditions fell six points to 51, the component measuring sales expectations in the next six months dropped nine points to 51, and the gauge charting traffic of prospective buyers declined four points to 30.
The three-month moving averages for regional HMI scores showed varied results: the Midwest increased three points to 49, the Northeast fell two points to 61, the South dropped two points to 49, and the West saw a four-point decline to 43.
HMI tables can be found at nahb.org/hmi. More information on housing statistics is also available at Housing Economics PLUS.
