The National Association of Home Builders/Wells Fargo Housing Market Index climbed to 37 in May, up from 34 in April, signaling a modest improvement in homebuilder sentiment but remaining deeply negative on the 0-100 scale where readings below 50 indicate more builders view conditions as poor than good. The May reading marks the 25th straight month that the index has registered below the break-even mark of 50.
Economists polled by Reuters had expected the index to remain steady at April's seven-month low of 34, making the move to 37 an unexpected uptick. Still, the broader picture remains cautious as industry leaders point to a combination of higher financing costs, elevated energy prices and geopolitical uncertainty that continue to weigh on prospective buyers.
Bill Owens, NAHB Chairman and a home builder from Worthington, Ohio, said the housing market remains weak as higher mortgage rates, rising gas prices and economic uncertainty from the war in Iran continue to reduce buyer demand. His comments reflect ongoing concern among builders about the ability of potential buyers to absorb rising carrying costs for new homes.
The affordability backdrop has shifted through the year. Freddie Mac reported that 30-year fixed-rate mortgage interest rates fell below 6% near the end of February, a level not seen since September 2022, offering a brief relief. However, U.S. and Israeli attacks on Iran at the end of February sparked an oil price jump that reignited inflationary pressures. That move has pushed yields on U.S. Treasury securities - which serve as a benchmark for mortgage rates - to their highest level in about 15 months. Home loan costs have risen since then and are expected to increase further, limiting the pool of qualified buyers.
NAHB Chief Economist Robert Dietz said recent increases in long-term interest rates will continue to constrain home buyer demand. He also noted that while a few regional markets, including parts of the Midwest, are showing relative strength, the sector as a whole is contending with significant affordability challenges.
On the pricing front, roughly 32% of builders reported reducing prices in May, down from 36% in April, while the average price cut increased to 6% from 5% the prior month. Sales incentives remain widespread: 61% of builders offered some form of incentive in May, up slightly from 60% in April and marking the 14th consecutive month in which the proportion has been at 60% or higher.
These data points underline a market in which builder sentiment has shown a small improvement but where structural pressures - notably higher borrowing costs and increased energy-driven inflation - continue to press on both demand and builder pricing strategies.