The National Association of Home Builders reported today (July 17) that its NAHB/Wells Fargo Housing Market Index fell four points to 24 in July, its lowest level since the recession of 1991.

The measure of builder confidence was well below what was expected on Wall Street, which was expecting an index number of 27.

All three component indices fell as well. The index gauging current single-family sales and the index gauging sales expectations in the next six months each declined five points to 24 and 34, respectively, while the index gauging traffic of prospective buyers declined three points to 19.

Regionally, the Northeast and South each saw five-point declines, to 31 and 26, respectively, while the Midwest slipped one point to 19 and the West fell three points to 25.

The NAHB attributed the negative psychology to the surplus of unsold homes, concerns about further fallout from the subprime mortage market and higher interest rates. "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," said NAHB Chief Economist David Seiders. "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."

On a brighter note, he said, "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."

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as either "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 sales conditions as good than poor.

In a research note to investors, Michael Rehaut, who leads the home building and building products team at J.P. Morgan Securities, said the numbers were not unexpected, but added that, regarding the sales traffic numbers , "While disappointed, we are not surprised, as it is consistent with continued builder commentary of subprime's negative effect on buyer psychology, as well as the recent rise in interest rates."