Homebuilder confidence posted its second-highest drop in the history of the NAHB/Wells Fargo Housing Market Index (HMI) in July, as home sales and buyer traffic were hampered by inflation and rising interest rates.     

The index fell 12 points to 55, its largest drop after the 42-point plunge in May 2020, the National Association of Home Builders said. The monthly decrease was the seventh one in a row as fears of a weakening housing market continue amid economic headwinds that make homes increasingly unaffordable for buyers. 

Any reading above 50 indicates that more builders view conditions as good than poor.    

“Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” said NAHB Chairman Jerry Konter, a homebuilder and developer from Savannah, Georgia. “In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations.” 

All three HMI components fell in July: Current sales conditions fell 12 points to 64, sales expectations for the next six months slid 11 points to 50 and traffic of prospective buyers declined 11 points to 37. 

“Affordability is the greatest challenge facing the housing market,” NAHB chief economist Robert Dietz said in a press release. “Significant segments of the homebuying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing.” 

Regionally, the three-month moving average of the index fell in all geographic regions, led by the West, with a 12-point decline to 62 and followed by the South with an eight-point fall to 70, the Northeast with a six-point slide to 65 and the Midwest with a four-point drop to 52. 

The NAHB/Wells Fargo survey measures builder perceptions of current single-family home sales, as well as sales expectations for the next six months, as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” The results are then used to calculate the seasonally adjusted index.