Home builder confidence suffered a near-record drop in July as high inflation and climbing mortgage rates stalled the housing market by slowing sales and discouraging potential buyers.
The National Association of Home Builders (NAHB) Housing Market Index (HMI) was released on Monday, showing how builder confidence in the market for newly-built, single-family homes dropped to 55.
It was the seventh straight monthly decline and a drop of 12 points since June, indicating a further sign of a weakening housing market, according to the NAHB.
The July score marked the lowest index reading since April 2020 — which was 30 — when most of the country was under some form of lockdown at the height of the COVID-19 pandemic. It also represented the largest single-month drop in the history of the HMI, except for the 42-point drop in April 2020.
The HMI can range between 0 and 100. Readings above 50 mean more builders view market conditions as good rather than poor — but experts said the July reading of 55 still represented additional signs of a weakening housing market.
"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, a home builder and developer from Savannah, Ga., said in a statement.
"In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations," Konter added.
What is the NAHB Housing Market Index?
The index is based on a monthly survey of National Association of Home Builders members designed to get a sense of the single-family housing market.
The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months — as well as the traffic of prospective buyers of new homes.
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 a majority of builders feel good about selling their homes in the housing market.
The HMI, which began in 1985, fell to a record low of 8 in January 2009. It set a record high of 90 in November 2020, statistics show.
Current housing market: ‘Affordability is the greatest challenge’
All three components of the home builders’ index saw declines in July 2022, according to the NAHB. Current sales conditions dropped 12 points to 64, sales expectations in the next six months declined 11 points to 50, and traffic of prospective buyers fell 11 points to 37.
The NAHB also shared three-month averages for different U.S. regions. The Northeast fell six points to 65, the Midwest dropped four points to 52, the South fell eight points to 70 and the West dropped 12 points to 62.
The housing market, a crucial part of the economy, is slowing as homebuyers face much higher home financing costs than a year ago following a rapid rise in mortgage rates. Sales of previously occupied U.S. homes slowed for the fourth consecutive month in May, and are expected to continue that trend when the National Association of Realtors issues its June snapshot this week.
Meanwhile, the average rate on a 30-year home loan climbed to 5.51% last week, according to mortgage buyer Freddie Mac. A year ago, the 30-year fixed-rate mortgage averaged 2.88%.
"Affordability is the greatest challenge facing the housing market," NAHB Chief Economist Robert Dietz said in a statement. "Significant segments of the home buying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing."
First-time home buyers accounted for 27% of transactions in May, down from 28% in April and 31% in May 2021, the National Association of Realtors said.
Real estate investors and other buyers able to buy a home with just cash, sidestepping the need to rely on financing, accounted for 25% of all sales in May, down from 26% in April, the group added.
This story was reported from Cincinnati. The Associated Press contributed.