Builder Sentiment Ticks Up in May, but Affordability Still Weighs on Sales

Builder sentiment improved slightly in May, spurred by modest increases in current and future sales conditions and a slight rise in traffic from prospective buyers.

Builder confidence ticked up by three points to 37 in May, according to the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) report, released on May 18. Builder sentiment improved as current and expected sales conditions both ticked up by three points, to 40 and 45, respectively, while traffic from prospective buyers inched up by three points to 25.

Despite the rebound, builders’ confidence in constructing new single-family homes has remained in negative territory for the past 24 months. Nearly one-third of homebuilders in the United States slashed prices in May as the housing market grapples with affordability challenges, according to the NAHB.

“The housing market remains soft as higher mortgage rates, rising gas prices, and economic uncertainty related to the war in Iran continue to dampen buyer demand,” NAHB Chairman Bill Owens said.

The May HMI survey showed that builders cut prices by an average of 6 percent to spur buyer decisions. About 61 percent of builders used sales incentives in May—the 14th straight month in which builders have offered sales incentives to help close deals. May is typically one of the stronger months of the year for home sales, according to a recent Zillow report.

The NAHB/Wells Fargo report shows that builder sentiment remains pessimistic—above 50 indicates optimism—in four primary geographic regions. The Midwest and Northeast both rose by one point, to 43 and 42, respectively. The South was flat at 35, while sentiment for homebuilding in the West dipped by one point to 28.

High fuel prices stemming from the war with Iran continue to affect consumer confidence. The national average for a gallon of gasoline on May 18 was $4.51, AAA reported. A year ago, fuel prices averaged $3.17 per gallon.

The average rate for a 30-year fixed mortgage, meanwhile, stood at 6.36 percent as of May 15, according to Freddie Mac’s Primary Mortgage Market Survey. Rates dipped by 0.01 percent from a week before and were down by 0.45 percent from a year earlier.

Mortgage rates are a trend to watch in the coming weeks and months, according to Ted Rossman, principal analyst at Bankrate.

“Most prospective buyers are very rate-sensitive,” Rossman said. “As the [HMI] report notes, builders are trying to mitigate the impact by offering teaser rates, free upgrades and other incentives, but sometimes those are tricks that encourage buyers to overpay.”

May’s existing home sales may see a slight increase from April, which reported a modest 0.2 percent increase in sales volume, according to the National Association of Realtors. The median sales price in April was $417,700, up by nearly 1 percentage point from a year earlier—the 34th consecutive month of year-over-year price gains.

“Recent increases for long-term interest rates will continue to hold back home buyer demand,” NAHB Chief Economist Robert Dietz said in a statement.

“Although some regional markets, including parts of the Midwest, are showing relative strength, the housing market continues to face significant affordability challenges.”