Builder Confidence Falls as Interest Rates Rise, Exacerbated by Rising Affordability Concerns

Builder confidence fell sharply in May, indicating that the housing market is now slowing, as rising affordability challenges in the form of rapidly rising interest rates, double-digit price increases for material costs, and ongoing home price appreciation are weighing on buyer demand.

According to the National Association of Home Builders (NAHB)/Wells Fargo, Housing Market Index (HMI) released Tuesday, May 17, builder confidence in the market for newly-built single-family homes fell eight points to 69 in May.

This is the fifth month in a row that builder sentiment has fallen, and it is the lowest reading since June 2020.

“Housing leads the business cycle, and housing is slowing,” said NAHB Chairman Jerry Konter, a Savannah, Ga.-based builder and developer.

“The White House has finally gotten the message, and yesterday released an action plan to address rising housing costs that emphasizes a very important element long-advocated by NAHB – the need to build more homes to alleviate the nation’s housing affordability crisis.”

“The housing market is facing increasing challenges,” NAHB Chief Economist Robert Dietz said. “Building material costs are up 19 percent from a year ago, mortgage rates have risen to a 12-year high in less than three months, and based on current affordability conditions, less than half of new and existing home sales are affordable for a typical family.” Entry-level and first-time homebuyers are particularly hard hit by the rapid rise in mortgage rates.”

The NAHB/Wells Fargo HMI is based on a monthly survey that NAHB has been conducting for more than 35 years and assesses builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.”

Builders are also asked to rate prospective buyer traffic as “high to very high,” “average,” or “low to very low” in the survey.

The scores for each component are then used to calculate a seasonally adjusted index, with any number greater than 50 indicating that more builders consider conditions to be good rather than poor.

In May, all three HMI indices experienced significant losses.

The HMI index measuring current sales conditions fell eight points to 78, the gauge measuring sales expectations in the next six months fell ten points to 63, and the component tracking traffic from prospective buyers fell nine points to 52.

In terms of three-month moving averages for regional HMI scores, the Northeast remained at 72, while the Midwest fell seven points to 62, the South fell two points to 80, and the West fell six points to 83.