Homebuilder sentiment takes historic hit

July marked second largest drop ever: National Association of Home Builders

A photo illustration depicting homebuilder sentiment (Illustration by The Real Deal with Getty Images)
A photo illustration depicting homebuilder sentiment (Illustration by The Real Deal with Getty Images)

As the housing market turns and sales slow, homebuilders are having a hard time hiding their concerns.

The National Association of Home Builders/Wells Fargo Housing Market Index took a historic plunge this month, dropping 12 points to 55 points. It was the second largest drop in the index’s history, trailing only the 42-point drop that came at the start of the pandemic.

The index tracks homebuilder confidence regarding current and future single-family home sales and traffic of potential buyers.

Supply constraints and volatile costs for materials and construction have plagued the industry since the onset of the pandemic. But builders are now also contending with a housing market that appears to be cooling as inventory remains low and mortgage rates rise.

“Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” NAHB chairman Jerry Konter said in a statement.

The index began showing significant signs of decline a few months ago as the Federal Reserve began raising interest rates, which made borrowing more expensive. As a result, people have become less likely to spend as heightened rates have made housing less affordable, trickling into sagging builder sentiment.

Sign Up for the undefined Newsletter

By signing up, you agree to TheRealDeal Terms of Use and acknowledge the data practices in our Privacy Policy.

Read more

All three components of the index declined in July. The component for current sales fell 12 points last month to 64, while sales expectations for the next six months dropped 11 points to 50. The traffic of prospective buyers also fell 11 points, all the way down to 37.

Confidence for a three-month average is at the lowest in the Midwest, down to 52 points. The West region had the largest decline, though, down 12 points to 62; every region dropped at least 4 points.

While confidence is flailing, the index is still in positive territory. Any number above 50 represents a belief that conditions are good, meaning the overall sentiment is still positive, even though the traffic of prospective buyers has moved deeper into poor sentiment.

NAHB chief economist Robert Dietz deemed affordability the “greatest challenge” in the housing market.

“Policymakers must address supply-side issues to help builders produce more affordable housing,” Dietz stated.