Builder confidence fell for the eighth consecutive month in August as elevated interest rates, supply chain problems, and high home prices continued to exacerbate housing affordability challenges, according to the NAHB.
The NAHB/Wells Fargo Housing Market Index (HMI), measuring builder sentiment in the market for newly built single-family homes, fell six points in August to 49. The index has fallen in every month of 2022 after reaching its peak level of 84 in December 2021. August marks the first time since May 2020 that the index reading has fallen below the break-even measure of 50, according to the NAHB.
“Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders,” says NAHB chairman Jerry Konter. “And in a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit.”
Approximately one in five builder respondents in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5% for those reporting using such incentives.
Nearly seven in 10 respondents identified higher interest rates as the reason for falling housing demand.
“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” says NAHB chief economist Robert Dietz. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand side of the market in the coming months.”
The 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 asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” For each component, a number over 50 indicates more builders view conditions as good than poor.
Each HMI component posted declines in August, and each fell to their lowest level since May 2020, according to the NAHB. Current sales conditions fell seven points to 57, sales expectations for the next six months declined two points to 47, and traffic of prospective buyers fell five points to 32. Regionally, the three-month moving average in the Northeast fell nine points to 56 in August, the three-month moving average fell three points to 49 in the Midwest, the average dropped seven points to 63 in the South, and it fell 11 points to 51 in the West.