As mortgage rates rose back above 7% in April, and remain high despite a recent decrease, homebuilders are pulling back their hopes for the housing construction market, according to the latest National Association of Home Builders (NAHB) data.
The NAHB/Wells Fargo Housing Market Index (HMI) for May registered at 45, six points down from the flat reading of 51 back in April.
This reading reverses the strong first few months of 2024, with a seven-point jump in January, a four-point rise in February and a three-point rise in March.
“The market has slowed down since mortgage rates increased, and this has pushed many potential buyers back to the sidelines,” said NAHB Chairman Carl Harris. “We are also concerned about the recent codes rules that require HUD and USDA to insure mortgages for new single-family homes only if they are built to the 2021 International Energy Conservation Code. This will further increase the cost of construction in a market that sorely needs more inventory for first-time and first-generation buyers.”
With a decrease in confidence, builders increased their use of cuts in home prices from 22% in April to 25% in May, ending four months of consecutive declines. The use of sales incentives also ticked up from 57% in April to 59% in May. However, the average price reduction in May held steady at 6% for the 11th straight month.
“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,” said NAHB Chief Economist Robert Dietz. “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.”
All three HMI component indices posted declines in May. The index charting current sales conditions in May fell six points to 51, the component measuring sales expectations in the next six months fell nine points to 51, and the gauge charting traffic of prospective buyers declined four points to 30.
Looking at the three-month moving averages for regional HMI scores, the Midwest increased three points to 49, the Northeast fell two points to 61, the South dropped two points to 49 and the West posted a four-point decline to 43.
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