Earlier this month, the National Association of Homebuilders (NAHB) released the NAHB/Wells Fargo Housing Market Index (HMI), showing the first decline in builder sentiment since November 2023.

The index for builder confidence in the market for newly built single-family homes was at 45 in May, down six points from April, according to the HMI. The association points to mortgage rates averaging above 7% for the past four weeks as a significant factor.

“The market has slowed down since mortgage rates increased and this has pushed many potential buyers back to the sidelines,” said NAHB chairperson Carl Harris, a custom home builder from Wichita, Kansas. “We are also concerned about the recent codes rules that require HUD and USDA to insure mortgages for new single-family homes only if they are built to the 2021 International Energy Conservation Code. This will further increase the cost of construction in a market that sorely needs more inventory for first-time and first-generation buyers.”

The HMI survey also revealed that 25% of builders cut home prices to bolster sales in May, ending four months of consecutive declines in this metric. However, the average price reduction in May held steady at 6% for eleven straight months. Meanwhile, the use of sales incentives ticked up to 59% in May from a reading of 57% in April.

“A lack of progress on reducing inflation pushed long-term interest rates higher in the first quarter and this is acting as a drag on builder sentiment,” said NAHB chief economist Robert Dietz. “The last leg in the inflation fight is to reduce shelter inflation, and this can only occur if builders are able to construct more attainable, affordable housing.”

NAHB tracks housing affordability. According to the affordability graph published in its current report, housing is not affordable to most Americans. The 2024 graph currently shows that 66.6 million households—49% out of a total of 134.9 million—are unable to afford a $250,000 home.

According to the organization, the nationwide median price of a new single-family home is $495,750, meaning half of all new homes sold in the U.S. cost more than this figure and half cost less. Further, the NAHB says that a total of 134.9 million households—roughly 77% of all U.S. households—cannot afford this median-priced new home based on a mortgage rate of 6.5%.

The NAHB affordability graph is based on conventional underwriting standards that assume the cost of a mortgage, property taxes and property insurance should not exceed 28% of household income.

It’s unclear if the numbers reflected in the HMI will eventually affect enough change in housing affordability across the country. All three HMI component indices posted declines in May, with current sales conditions in May having fallen six points to 51, the component measuring sales expectations in the next six months dropping nine points to 51 and the gauge charting traffic of prospective buyers declining four points, to 30.

Looking at the three-month moving averages for regional HMI scores, aside from the Midwest—which increased three points to 49—builder confidence is down across other regions. The Northeast score fell two points to 61; the South dropped two points to 49; the West posted a four-point decline to 43.

Leave a Reply

Your email address will not be published. Required fields are marked *