Sentiment among homebuilders fell for the first time in six months in May as mortgage rates above 7% kept buyers on the sidelines and weighed on expectations.
The National Association of Home Builders/Wells Fargo index of housing market conditions fell 6 points to 45 in May, the lowest level since the start of the year. This month’s numbers fell short of estimates from all economists in a Bloomberg survey, who had an average forecast of 50.
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A gauge of builders’ sales prospects for the next six months fell 9 points, the most since October 2022, to 51 this month.
“A lack of progress in reducing inflation has pushed long-term interest rates higher in the first quarter, hurting sentiment among builders,” NAHB chief economist Robert Dietz said in a statement. “The final step in the fight against inflation is to reduce housing inflation, and this can only happen if builders are able to build more attainable, affordable housing.”
The NAHB gauge of potential buyer traffic fell 4 points to 30, the lowest level since January, while a measure of current sales fell for the first time since November.
A combination of still high prices and a thirty-year mortgage interest rate that remains above 7% has ensured that housing affordability is at an all-time low in a NAHB
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Builders have taken advantage of buyers’ fears, lowering customers’ mortgage rates and, in some cases, lowering the prices and sizes of homes. Prices of new homes have fallen 1.9% compared to a year ago. However, according to the National Association of Realtors, there is still a shortage of homes in the resale market, where prices were still 4.8% higher in March than a year earlier.
While some builders are reporting strong demand due to the few options available in the resale market, persistently high financing costs are still leaving many potential buyers waiting for a drop in interest rates.
“The market has slowed since mortgage rates rose and this has pushed many potential buyers to the sidelines,” NAHB Chairman Carl Harris, a builder from Wichita, Kansas, said in a statement.
This month, 25% of builders reported that they had reduced house prices, compared to 22% in April and 36% in December 2023. The average price decline remained stable for the eleventh month in a row at 6%. The share that used sales incentives rose to 59% from 57% in April, the NAHB report showed.
Builder sentiment fell in all US regions from a month earlier, particularly in the West, where the index fell 12 points to 36. The Northeast saw a decline of 7 points to 58.