Homebuilder sentiment on the U.S. housing market has dropped another eight points this month to 38—half its level from just six months ago. 

That’s according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on October 18th. 

Here’s what you need to know. 

Ten straight months of decline

Designed to gauge market conditions, the HMI provides a snapshot of homebuilder sentiment on single-family home sales, sales expectations, and prospective buyer traffic. 

The overall rating for October 2022 shows a decline for the tenth straight month, reaching the lowest number since August 2012, with the exception of the spring of 2020 when the pandemic first hit. 

The Housing Market Index (HMI)

For over 35 years, the NAHB has been publishing its Housing Marketing Index, in collaboration with Wells Fargo, to assess builder perceptions of the housing market. 

Builders rate single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” They also rate prospective buyer traffic as “high to very high,” “average,” or “low to very low.” 

Scores are then converted to a seasonally-adjusted index. Any number over 50 means more builders view housing market conditions as good than poor. That number fell below 50 in August. 

NAHB-Wells-Fargo-HMI

All three components of the HMI posted declines for October: 

  • Current sales conditions: -9 pts to 45
  • Sales expectations in the next 6 months: -11 pts to 35
  • Prospective buyer traffic: -6 pts to 25

Regional HMI scores, based on the three-month moving averages:

  • Northeast: -3 pts to 48
  • Midwest: -3 pts to 41
  • South: -7 pts to 49
  • West: -7 pts to 34

The complete HMI tables are available online

Rising rates feed pessimistic outlook

Builders cite mortgage rates above 7% – combined with three successive interest rate hikes and Fed Chairman Powell’s expressed intention of correcting the housing market – as reasons for the decline in confidence. 

Mortgage rates above 7% have priced many buyers out of the market. And homeowners with lower mortgage rates locked down for their current homes have less incentive to upgrade, especially with inflation driving up other costs. 

High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers. This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.

Jerry Konter

NAHB Chairman

Homebuilders are already offering discounts to buyers to move inventory. Robert Dietz, NAHB Chief Economist, expects further declines in single-family starts for the coming year. 

This will be the first year since 2011 to see a decline for single-family starts. And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues. While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.

Robert Dietz

NAHB Chief Economist

Top takeaways for real estate agents

With homebuilder sentiment in the negative zone and continuing to drop, we may see a decline in new building inventory to offset cooling buyer demand. 

While this could adversely affect the number of housing options available to buyers, it could also work to the advantage of homeowners looking to sell. As supply dips, competition for homes is likely to increase, driving prices back up. 

As for your buyer clients, help them secure every advantage you know of (always be learning) to make the homes they want more affordable to them. 

Make every relationship with a client an opportunity to improve their lives in a lasting way, whatever they decide to do in the immediate future. And give them a reason to look forward to every new communication from you.