Lack of Progress on Inflation Pushes Homebuilder Sentiment Back Into Negative Territory

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Higher mortgage rates are taking a toll on homebuilders in May.

U.S. homebuilder sentiment declined for the first time in six months as mortgage rates jumped above seven percent, the National Association of Home Builders (NAHB) said Wednesday.

The NAHB/Wells Fargo Housing Market Index, a key measure of housing market conditions, dropped by 6 points to 45, its lowest level since the beginning of the year.

Economists had expected the index to hold steady at the prior month’s reading of 51. In March, the gauge climbed just above the 50 threshold that marks the difference between negative and positive sentiment for the sector. It was unchanged from that level in April.

The index tracking builders’ sales expectations for the next six months saw a steep decline, falling by 9 points to 51, the most substantial drop since October 2022.

“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.”
The measure of prospective buyer traffic tumbled by four points to 30, the lowest reading since January. Additionally, the index of current sales saw a decline for the first time since November, slipping six points to 51.

Mortgage rates began climbing at the end of March after a series of worse than expected reports on inflation were seen as delaying any rate cuts from the Federal Reserve. The average rate on a 30-year fixed mortgage has been above seven percent for the past four weeks, peaking at 7.22 percent in the first week of May, according to data from Freddie Mac.

“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, a custom home builder from Wichita, Kan.

Regulations Hurting Building

Builders say they are also being hurt by new regulations coming out the Biden administration.
“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,” Harris said.


In May, 25 percent of builders reported cutting home prices, up from 22 percent in April. This was the first rise following four months of consecutive declines. The average price reduction remained steady at 6 percent for the 11th consecutive month, according to the NAHB. The proportion of builders using sales incentives increased to 59 percent from 57 percent in April.



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