The latest report shows that not only are buyers pessimistic about the real estate market, but builders also share the same sentiment. Builders' confidence remains low, but there is a glimmer of hope amidst the gloom.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index, released on Wednesday, dropped by 2 points in May, falling from 45 to 43. This change indicates that builders' confidence in the market remains insufficient. NAHB is an association composed of over 700 organizations, with more than 140,000 professionals in home building and remodeling, mortgage lending, and financial industries. Each month, NAHB surveys its members to assess the current state of the housing market, focusing on three main areas: current single-family home sales, market forecasts for the next six months, and traffic of potential buyers. A rating of 50 or above indicates confidence in the market.
In the May survey, members rated current sales conditions at 49, sales expectations at 47, and potential buyer traffic at 28. Regionally, the Northeast performed best, scoring 62; the Midwest scored 40, the South 43, and the West 38. Over the past year, the index's scores have fluctuated significantly, ranging from a high of 56 in July 2023 to a low of 37 in December 2023.
Data released on Thursday by the U.S. Census Bureau and the Department of Housing and Urban Development showed a decline in new housing starts in May, reflecting decreased market confidence. Residential starts in May totaled 1,277,000 units, down 5.5% from April and 19.3% year-on-year from 1,583,000 units in May 2023. Additionally, building permits dropped 3.8% month-on-month, from 1.44 million in April to 1.386 million in May. The only bright spot was a slight increase in housing completions, with 1,514,000 units last month, up 1% year-on-year.
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NAHB Chairman Carl Harris noted that high interest rates are keeping potential buyers away, with the current 30-year fixed mortgage rate hovering above 7%. He said in a press release, "Builders are also facing rising interest rates on construction and development loans, long-term labor shortages, and a lack of buildable lots."
NAHB Chief Economist Robert Dietz added that inflation is not helping the situation. He pointed out, "We are in an unusual situation due to the lack of progress in reducing housing inflation. The best way to reduce housing inflation and bring overall inflation down to the 2% range is to increase the national housing supply. Creating a more favorable interest rate environment for construction and development loans would help achieve this goal."
Realtor.com economist Ralph McLaughlin expressed a similar view: "The decline in builders' confidence and housing starts in May indicates that the new home and existing home markets are more alike than different. High interest rates are prompting builders and existing homeowners to cut back this spring, whereas normally it would be a race to capture peak seasonal supply."
NAHB has been compiling the Housing Market Index since 1985. The index dropped to an all-time low of just 8 in January 2009, following the 2008 global financial crisis. In contrast, it reached an all-time high of 90 in November 2020 due to the real estate boom triggered by the COVID-19 pandemic.
Although NAHB's latest rating reflects a decline in market confidence, there are signs of positive change. A report released by Realtor.com in May 2024 found that the number of affordable homes on the market has increased. At the same time, Harvard University's Joint Center for Housing Studies released its "State of the Nation’s Housing 2024" report, indicating that despite high interest rates and prices deterring many buyers, single-family home construction is accelerating.
McLaughlin also noted that while housing construction seems to be suppressed, this "may be a direct response to the market's expectation of delayed interest rate cuts this year." He believes, "We should expect that when interest rate cuts finally occur, both builders' and sellers' confidence will be boosted."
