Homebuilder Confidence Falls Back Into Negative Territory in May

Homebuilder confidence unexpectedly fell in May, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index. Builder confidence in the market for newly-built single-family homes fell to 45 in May, down six points from April and the lowest level since January.

By the numbers:

• Overall HMI: The index fell to 45, pushing builder confidence back into negative territory.
• Component indices:
  • The index for current sales conditions dropped six points to 51.
  • Sales expectations for the next six months plummeted nine points to 51.
  • Traffic of prospective buyers decreased by four points to 30.

Regional breakdown:

• West: Saw the largest decline, falling 12 points to 36.
• South: Dropped five points to 45, moving into negative territory.
• Midwest: Declined one point to 49.
• Northeast: Despite a seven-point drop, it remains the most confident region at 58 and is the only region still in positive territory.

What they’re saying:

• Robert Dietz, NAHB Chief Economist, highlighted the challenges facing the housing market. “A lack of progress on reducing inflation pushed long-term interest rates higher in the first quarter, and this is acting as a drag on builder sentiment. The last leg in the inflation fight is to reduce shelter inflation, and this can only occur if builders are able to construct more attainable, affordable housing.”

The big picture:

• The significant drop in builder confidence underscores the ongoing struggles within the housing market, driven by rising interest rates and persistent inflation.
• The decline across all HMI components and regions indicates widespread concerns among builders about future sales and buyer traffic.

Mortgage Rate Impact: Chairman Powell is aware of the conundrum that is housing. We need to keep rates high to slow inflation but keeping rates elevated means fewer borrowers qualify for homes and fewer homebuilders want to build when demand is low and borrowing costs are high. However, because existing inventory remains historically low home prices continue to remain elevated even with demand at 30-year lows. So how do you encourage builders to build without lowering rates? That is the $64,000 question…