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Homebuilders lament the housing recession

Homebuilders are dropping prices and using incentives to limit cancellations

Homebuilder confidence hit its lowest level since May 2020 in August, marking the eight consecutive month of an increasingly pessimistic outlook, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report, released Monday.

In August, builder sentiment in the market for newly built single-family homes fell six points from July to a reading of 49. This is the first time since May 2020 that the index has fallen below the breakeven point of 50.

The NAHB/ HMI report is based on a monthly survey of NAHB members, in which respondents are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the survey are then used to calculate an index, in which any number greater than 50 indicates more homebuilders view conditions as favorable than not.

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” Robert Dietz, NAHB’s chief economist, said in a statement.

Housing affordability has become a struggle for more and more Americans as both interest rates and home prices have continued to rise. According to the NAHB survey, 69% of builders reported higher interest rates as the reason behind falling housing demand, the top impact cited in the survey. 

As builders look to continue selling homes, 19% of those surveyed reported reducing prices in the past month to increase sales or limit cancellations, with 5% seeing overall reduction in median price.

Three other indices monitored by the NAHB also fell to their lowest level since May 2020 in August. The gauge measuring current sales conditions fell seven points, month over month, to 57, while the component analyzing sales expectations for the next six months fell two points to a reading of 47 and the index charting traffic of prospective buyers posted an five-point drop, to 32 points.

Regionally, the three-month moving averages for HMI scores fell in all four regions, to: 49 in the Midwest, 63 in the South, 51 in the West and 56 in the Northeast.

Another survey, the BTIG/HomeSphere State of the Industry Report, also noted sizable decreases in homebuilder outlook. According to the survey, 60% of respondents saw year-over-year decreases in sales ordered per community in July and 58% reported a yearly decrease in traffic.

The BTIG/HomeSphere study is an electronic survey of approximately 50-100 small- to mid-sized homebuilders that sell, on average, 50-100 homes per year throughout the nation. In July the survey had 113 respondents.

This was the softest reading for both the sales order and traffic metrics in the   history of the survey.

Despite these declines, Dietz sees some reasons for optimism.

“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011,” Dietz said in a statement. “However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”