Builder confidence in the market for newly built single-family homes was 45 in May, down six points from April, according to the newly released National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The drop marks the first decline since November 2023. The National Association of Home Builders is attributing the drop to data from Freddie Mac that reports mortgage rates averaged above 7% for the past four weeks. Despite the drop in sentiment, new home sales have increased in recent months. 

“The market has slowed down since mortgage rates increased, and this has pushed many potential buyers back to the sidelines,” said NAHB Chairman 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.” 

“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.” 

The May 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 the 11^th straight month. Meanwhile, the use of sales incentives ticked up to 59% in May from a reading of 57% in April.

Derived from a monthly survey that the National Association of Home Builders 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 component indices posted declines in May. The HMI index charting current sales conditions in May fell six points to 51, the component measuring sales expectations in the next six months fell nine points to 51 and the gauge charting traffic of prospective buyers declined four points to 30.

Looking at the three-month moving averages for regional HMI scores, the Midwest increased three points to 49, the Northeast fell two points to 61, the South dropped two points to 49 and the West posted 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 (formerly housingeconomics.com).