High mortgage rates and construction costs dampen builders' housing market view
Builder sentiment in the US housing market has fallen to its lowest point since December 2023, according to a new report by the National Association of Home Builders (NAHB).
The June NAHB/Wells Fargo Housing Market Index (HMI) reached 43, a two-point decline from May. All three HMI components – current sales conditions, sales expectations for the next six months, and traffic of prospective buyers – fell below the key threshold of 50 for the first time since December 2023. This means that more builders view market conditions as poor than good.
What’s behind the downturn? Mortgage rates stubbornly stuck above 7% and rising construction costs.
“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” NAHB chairman Carl Harris said in the association’s latest HMI report. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages and a dearth of buildable lots.”
Builders are struggling to attract buyers in this environment. The June survey revealed that 29% of builders cut home prices to bolster sales, the highest share since January 2024 at 31% and up from 25% in May. However, the average price reduction held steady at 6% for the 12th consecutive month.
Meanwhile, the use of sales incentives ticked up to 61% in June from 59% in May, the highest share since January when it stood at 62%.
“We are in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%,” explained NAHB chief economist Robert Dietz.
“The best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply. A more favorable interest rate environment for construction and development loans would help to achieve this aim.”
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The NAHB HMI survey, conducted for over 35 years, gauges builder perceptions of the single-family home market through a monthly survey. Builders rate current sales conditions, sales expectations for the next six months, and prospective buyer traffic as good, fair, or poor.
Looking regionally, the HMI scores show a decline across the board. The three-month moving averages for June are Northeast (steady at 62), Midwest (down three points to 47), South (down three points to 46), and West (down two points to 41).
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