“Homebuilder confidence down 10 straight months, according to the National Association of Home Builders.” We hear this term in many financial reports, but what does it mean? (It’s not Bob the Builder grinning in the mirror as he recites his morning affirmations:)

HMI – What is “Home Builder Confidence”?

The NAHB, National Association of Home Builders, has conducted a monthly survey for more than 35 years, the NAHB/Wells Fargo Housing Market Index, or HMI. The HMI rates builder perceptions of current single-family home sales and the expectations of sales 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.” Both components are then used to calculate a seasonally adjusted score, or index in which any number over 50 indicates that more builders view conditions as good, rather than poor.

Scores are reported for regional markets and nationally. The news that home builder confidence held steady sounds nice… maybe until you see that the score was 86, for instance.

The real news in Fall 2022 is that it has been declining, not a surprise. After reaching a high of 84 in December 2021, the HMI has been declining since, to reach 46 in September.

The Details:

The score is broken down into single-family sales for the present (45), single-family sales projected for the next six months (35), and traffic of prospective buyers (25).

The interesting number is the prospective buyers traffic: the score is 25, which has been steadily decreasing since December last year, which was 71.

And the survey reports that fewer people are moving this year. The HMI moving average was down year-over-year in all four regions of the country:

The West – Down from 83 to 34
The Midwest – Down from 68 to 41
The Northeast – Down from 72 to 48
The South – Down from 80 to 49

“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.”

What Does the Home Builders Confidence Index Mean?

As the name implies, HMI is a measure of confidence in the economy from those in the home building industry. According to the NAHB, each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue.

You can see that the new-home sector of the industry is important to the overall economy. It would seem to me that this is the point of the change of direction as the accordion plays, the “squeeze” is over, and as the industry tries to expand, it faces some problems, like not enough workers, but limited ability to hire new workers. We’ve also seen the negative effects of supply chain issues and cost of lumber.

Tight lending standards are often blamed during these “recovery, but not quite recovered” economic times. This year we can definitely blame higher interest rates. See the effects of interest rates on your mortgage.

The spring market will be an indicator of the state of the industry, and time will tell how quickly the recovery will march on. We have heard from three experts lately that the banking and lending industry expects rates to level off and decrease by the second quarter of 2023.

But at least bankers feel mildly optimistic…we’ll return with updates in 2023.

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Related Article: New Home Construction Returns to Frederick

Photo Credit: Hakan Dahlstrom on Flickr