The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) continues its slide down in 2007, dropping to its lowest level since 1991. The latest HMI was jointly released Tuesday afternoon. The organizations cite unsold surplus, the looming subprime lending issues, and affordability issues connected to tightening lending standards as the primary reasons for the continued drop.

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 on a monthly basis. In addition, the survey asks builders to rate traffic of prospective buyers as either high to very high, average to very low. Scores are then used to calculate a seasonally adjusted index.

Although housing starts from May to June were up 2.3 percent to an annual rate of 1,467,000 (but still down more than 19 percent from June 2006) according to a report (PDF) jointly released by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD) on Wednesday morning, the jump is attributed to an increase in apartment construction. Single-family starts were flat at a rate of 1,151,000 units, down 0.2 percent from May, and building permits dropped 7.5 percent below the May rate of 1,520,000 units (25 percent below June 2006) the lowest level in a decade.

"The bottom line is that the single-family housing market is still in a correction process following the historic and unsustainable highs of the 2003-2005 period," NAHB Chief Economist David Seiders said in a press release. "Builders are actively trimming prices and offering buyer incentives to work down their inventories, but meanwhile there is a large supply of vacant existing homes on the market, and affordability problems persist despite efforts to attract buyers.

"In spite of these challenges, we expect to see home sales get back on an upward path late this year, and we expect housing starts to begin a gradual recovery process by early next year. At that point, this market will be operating well below its long-term potential, providing plenty of room to grow in 2008 and beyond," concludes Seiders.

According to the NAHB, all components of the Housing Market Index dipped to their lowest levels since January 1991. Declines were seen in all four regions of the U.S., with the Northeast and South registering the largest drops of five points.

"Worse news is going to happen at the bottom," comments Mark Vitner, senior economist for Wachovia. "I expect things will hold at this level until the end of the year."