US Homebuilder Confidence Plunges Amid Inflation, Affordability Crisis

A "for sale" sign hangs in front of a home in Miami on June 21, 2022. Joe Raedle/Getty Images

Homebuilder confidence in the United States fell in July amid rising interest rates and high inflation that have slowed down sales, according to the National Association of Home Builders (NAHB).

The NAHB/Wells Fargo Housing Market Index (HMI) dropped 12 points to 55 in July, the lowest HMI reading since May 2020, according to a July 18 press release. This is also the second-largest single-month drop in the index’s history, following the 42-point drop in April 2020.

The three-month HMI moving averages of all four regions also fell, with the Northeast falling by six points, the Midwest by four points, the South by eight points, and the West by 12 points.

“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 home builder and developer from Savannah, Georgia, in the press release.

In another sign of the “softening market,” 13 percent of builders surveyed said they'd reduced home prices during the previous month to boost sales or limit cancellations, Konter added.

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

According to NAHB Chief Economist Robert Dietz, the greatest challenge facing the housing market is affordability.

“Significant segments of the home buying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing," Dietz said in the press release.

Affordability Increasingly Out of Reach

Housing affordability has been a growing challenge in the United States. According to the National Association of Realtors (NAR), affordability fell to its lowest level in 16 years in May 2022.

While the median family income only rose by 4.5 percent in the preceding 12 months, the income needed to qualify for a mortgage rose by over 50 percent. Monthly payments as a percentage of income rose from 16.9 to 24.4 percent. The median price of an existing single-family home rose from $361,300 to $414,200.

“The housing market is cooling significantly, with higher mortgage rates and affordability being top of mind for builders and potential homebuyers,” said Chad Moutray, director of the Center for Manufacturing Research, in a July 18 Twitter post.

“Sales growth remains slightly positive, but buyers have been spooked by still-elevated home prices and higher borrowing costs," Moutray wrote.

A July report from the nonprofit organization Up for Growth declared America to be in the middle of a “housing crisis.”

Authors of the report noted that there is a shortage of 3.8 million homes in the country. When accompanied by a rapid increase in prices, this results in an increasingly prohibitive market.