Builders are encountering seriously wary consumers this summer, according to the latest numbers from the NAHB/Wells Fargo housing market index (HMI), which measures home builders’ confidence in the housing market.

Current sales, buyer traffic, and sales expectations for the next six months all fell in July, resulting in an overall HMI reading of 14. This represents a two-point slip from last month and is also the lowest level for the index since April 2009.

"This month's lower HMI reflects a number of underlying market conditions that builders are seeing, including hesitant home buyers, tight consumer credit, and continuing competition from foreclosed and distressed properties that are priced below the cost of construction," said David Crowe, the NAHB’s chief economist."The pause in sales following expiration of the home buyer tax credits is turning out to be longer than anticipated due to the sluggish pace of improvement in the rest of the economy. “

The HMI component measuring current sales dropped two points to 15, future sales expectations slipped one point to 15, and buyer traffic tumbled three points to a wince-inducing reading of 10, despite historically low mortgage rates averaging less than 5% for a 30-year fixed-rate loan.

Such declines suggest that the housing recovery remains elusive. “All [HMI]components are at their lowest level seen over the past 12 months. We believe this adds further support to the view that government stimulus was largely responsible for improved housing demand in late 2009/early 2010,” said Carl Reichardt, a senior equity research analyst with Wells Fargo Securities in San Francisco. “Absent further stimulus or an improvement in job growth, we do not see how housing demand will grow significantly given excess vacant supply. As such, we believe builders will struggle to achieve sustainable profitability.”

Others sounded less troubled about the state of the market. “While we continue to expect demand to be more challenged and builder orders to be solidly negative through [the third quarter of 2010], we also believe that supply continues to be manageable and largely supportive of home prices,” said Michael Rehaut, an analyst with J.P. Morgan’s North American equity research group. “Specifically, we point out that existing homes for sale are currently 15% below their peak, and moreover, note that the more moderate pace of liquidation of foreclosures and shadow inventory continues to be firmly in place, which we believe will persist over the next 12 to 24 months.”

NAHB’s Crowe also remains guardedly optimistic. “We do believe that favorable factors such as low mortgage rates, affordable prices, and demographic trends will help revive consumer demand for new homes this year, and that new-home sales will improve by 10% in 2010 from 2009,” he said.

Alison Rice is senior editor, online, at BUILDER magazine.

Learn more about markets featured in this article: San Francisco, CA.