High mortgage rates, averaging 6.92% in June, along with elevated construction and development loan rates, continue to dampen builder confidence. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for July fell to 42, the lowest since December 2023.
Builder confidence in the market for newly built single-family homes fell to 42 in July, down one point from June, according to the NAHB/Wells Fargo HMI. This is the lowest reading since December 2023. The HMI index charting current sales conditions in July fell one point to 47, and the gauge charting traffic of prospective buyers also declined by a single point to 27. However, the component measuring sales expectations in the next six months increased by one point to 48.
Mortgage rates, which averaged 6.92% in June according to our mortgage rates tracker, along with elevated rates for construction and development loans, continue to put a damper on builder sentiment. While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data shows signs of easing.
Though inflation is still above the Federal Reserve’s target of 2%, it appears to be back on a cooling trend. NAHB is forecasting Fed rate reductions to begin at the end of this year, which will lower interest rates for home buyers, builders, and developers. Despite an increase in home inventory, total market inventory remains lean at a 4.4 months’ supply, indicating a long-run need for more home construction.
The July HMI survey revealed that 31% of builders cut home prices to bolster sales in July, up from 29% in June. However, the average price reduction in July held steady at 6% for the 13th straight month. Meanwhile, the use of sales incentives remained steady at 61% in July, the same as in June.
Looking at the three-month moving averages for regional HMI scores:
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." The survey also asks builders to rate traffic of prospective buyers as "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 conditions as good than poor.