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Homebuyers aren’t the only people feeling a lack of hope about the housing market—homebuilders share that sentiment, too, according to a new report.
The National Association of Home Builders/Wells Fargo Housing Market Index, released on Wednesday, decreased by 2 points in May, dropping from 45 to 43, indicating a continued lack of confidence among homebuilders about the market.
The NAHB comprises more than 140,000 members from more than 700 organizations in the homebuilding and remodeling, mortgage and finance, and home construction industries.
Each month, the organization surveys its members to assess the home market with an eye toward three factors: current single-family home sales, their predictions for the housing market over the next six months, and the traffic of prospective buyers. A rating of 50 or above indicates the NAHB feels confident about the market.
In May, members rated sales conditions 49, sales expectations 47, and traffic 28. On a regional level, the Northeast fared best, scoring 62. The Midwest scored 40, the South averaged 43, and the West saw 38.
Over the past year, index scores have ranged from a high of 56 in July 2023 to a low of 37 in December 2023.
‘An unusual situation’
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development also released numbers on Thursday that indicated decreased confidence in the housing market with a dip in housing starts in May.
This month, there were 1,277,000 residential housing starts, a 5.5% decrease from April and a 19.3% year-over-year decrease from May 2023, when 1,583,000 housing starts were reported.
The bureau also reported a 3.8% month-over-month decrease in building permits—from 1,440,000 in April to 1,386,000 the following month. The one bright spot was a slight increase in housing completions. There were 1,514,000 this past month, a 1% increase over completions for the same period in 2023.
NAHB Chair Carl Harris says high interest rates are keeping prospective buyers out of the market. Current interest rates for a 30-year fixed mortgage are hovering above 7%.
“Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots,” he said in a press release.
NAHB Chief Economist Robert Dietz added that inflation isn’t helping the situation.
“We are in an unusual situation because a lack of progress on reducing shelter inflation, ” he said. “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.”
“May’s fall in homebuilder confidence and housing starts suggest that the new and existing home markets are more similar than they are different,” says Realtor.com economist Ralph McLaughlin. “High rates are inducing both builders and existing homeowners to throttle back this spring in what is normally a race to peak seasonal supply.”
Signs of hope for the housing market
The NAHB has been conducting the Housing Market Index since 1985. The organization’s lowest score ever was 8 in January 2009 following the 2008 global financial crisis. It issued a record-high score of 90 in November 2020 as the COVID-19 pandemic housing market boomed.
While the NAHB’s latest rating reflects diminishing confidence in the market, there have been small indications of positive shifts. A May 2024 report from Realtor.com found there to be an increase in affordable homes on the market.
Meanwhile, the Joint Center for Housing Studies at Harvard University’s State of the Nation’s Housing 2024 report, also released on Thursday, says that although high interest rates and home prices have locked many homebuyers out of the market, their data notes an acceleration in single-family home construction.
McLaughlin also points out that, although homebuilding may seem subdued, this “is likely a direct response to a delay in rate cuts that the market was expecting to happen this year,” he says. “We should anticipate increased confidence of both builders and sellers when the cuts do finally arrive.”