Although material cost pressures have shown some signs of alleviating (for example lumber and copper futures have been grinding lower), the cost to finance a home has only increased with the national average of a 30-year fixed-rate mortgage hovering around 5.5%. That higher cost dampens demand, and homebuilder sentiment has taken a sharp turn lower. The NAHB’s Housing Market Index fell from a top 5% reading of 77 last month all the way down to a new 52-week low of 69 this month. The index has been rolling over for some time now after peaking all the way back in November 2020, and the 8-point month-over-month decline in May is the worst of that span, ranking as the fourth largest monthly decline in the history of the index. Two of those larger declines came in the midst of recessions/major economic shocks—October 2001 (9/11) and April 2020 (start of the pandemic).The other largest drop was in February 2014.

The big drop in the headline index points to a notable deterioration in reported conditions and similar drops were shared across the sub-indices. Present sales remain the most elevated with its reading of 78 managing to stay in the top decile of its historical range, but just barely so as the 8-point m/m decline also ranks as one of the largest on record. Even though reported sales are holding up decently (albeit far from improving), sentiment for future sales has collapsed. After a double-digit decline this month, the index is below its historical median meaning homebuilders are anticipating activity to slowdown in the coming months. One likely reason is that overall traffic has pulled back sharply. The 9-point month-over-month drop is tied for the second-largest decline on record.

From a geographic standpoint, this month was interesting. As with the national indices, the Midwest and West saw some of the sharpest activity pullbacks in the history of the survey. Those indices are now around similar levels to the spring of 2020. For the South, the decline did not result in an outright collapse below the post-pandemic range, but nonetheless, the decline was enormous by historic standards.

Then there’s the Northeast. While the rest of the country experienced sharp pullbacks, the Northeast index actually rose by 2 points to 76. Although the level remains middling versus its post-pandemic range, it is a notable divergence compared to the rest of the country.

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In spite of the report on homebuilder sentiment, homebuilder stocks, as proxied by the iShares US Home Construction ETF (ITB), are actually higher alongside the rest of the market, currently up 1.3%. Those gains on top of the past few days’ rally appear more technical in nature than any sort of improvement in the overall backdrop for the space.As shown below, the group has been hit hard this year as mortgage rates have soared. Hardly at any point, this year has the group managed to trade above its moving averages.