Homebuilder sentiment took a dive this month, dipping to its lowest point since June of 2020 – and marking the biggest single-month drop in the NAHB/Wells Fargo survey’s 37-year history.
The only exception is April 2020, when homebuilder confidence was at its all-time lowest at the beginning of the COVID pandemic.
Homebuilders are now seeing the effects of inflation, surging home prices, and high mortgage rates on buyer demand.
More buyers are canceling deals or asking builders to negotiate on prices. And, according to the survey, 13% have done so to boost sales and/or prevent cancellations. And that’s for buyers who haven’t been priced out of the market.
With the cost of building new homes – and supply already low – more people are asking the question: will homebuilders stop building?
Tracking homebuilder sentiment: What is the HMI?
For over 35 years, the NAHB/Wells Fargo Housing Market Index (HMI) – based on a monthly survey of NAHB members – has gauged homebuilder sentiment on the single-family housing market.
The results of the survey are the weighted average of three component indices:
- Present single-family home sales
- Single-family sales for the next six months
- Traffic of prospective buyers
Every month, a panel of homebuilders rates the first two of those on a scale of “good,” “fair,” or “poor.” They rate the last as “high to very high,” “average,” or “low to very low.” The HMI can range between 0 and 100; anything over 50 is considered “good.”
Results for July fell 12 points to 55, continuing a seven-month decline. It’s the second-biggest single-month drop in the HMI’s history. April 2020’s 42-point drop remains the biggest (for now).
What would help reignite homebuilder sentiment?
On Monday, Jerry Howard, National Association of Home Builders CEO, warned of a tough time ahead for the home building industry as data points to a slowdown in the housing market.
As for what would turn things around, he has some suggestions:
- Bring down the cost of building materials
- Fix the supply chain
- Negotiate a lumber deal with Canada
- Eliminate unnecessary regulations
Affordability is the biggest hurdle, with production bottlenecks, rising building costs, and high inflation causing many builders to hit the pause button on construction. In many cases, the cost of land, construction, and financing is higher than the appraised value of the homes being built.
Howard hopes policymakers will take his warnings as a last cry for help and do something before things get worse.
In his words, “Homebuilders won’t build if they see continuous signs of an impending recession.”
Not all homebuilders are worried
In this week’s episode of The Real Word podcast, Byron Lazine talked about a recent trip to Naples, Florida, where he met with homebuilders working on several new higher-priced communities.
These builders aren’t worried. They release only four new homes at a time, each attracting 30 bids. Demand is strong, and builders are at an advantage with the pricing.
That doesn’t negate the concerns of homebuilders whose perspective on the market has soured for seven straight months. But it does help identify market niches where homebuilder confidence is at its lowest—along with the clients most likely to feel the effects.
What does this mean for real estate agents?
What can you do as a real estate agent to alleviate your clients’ fears about the housing supply? Or what could you learn this week to be more helpful to your prospects?
Nicole White made a suggestion during Tuesday’s episode of The Real Word that could also boost homebuilder confidence, though in a less direct way:
I think it’s now time to over-educate the agents on the building process and what they can expect…. it could actually ease the concerns of these buyers, which would then maybe even spark these builders’ sentiments back up to where they feel they can start building again.