Benzinga | Aug 17, 2021 01:32PM EDT

Why Did Home Builder Confidence Level Drop To A 13-Month Low?

U.S. builders have become increasingly pessimistic on the state of housing as the monthly Housing Market Index (HMI) published by the National Association of Home Builders (NAHB) and Wells Fargo & Co (NYSE:WFC) dropped five points to an August reading of 75, its lowest level since July 2020.

What Happened: The HMI measures builder perceptions of current single-family home sales and sales expectations for the next six months as either "good," "fair" or "poor" while also measuring the traffic of prospective homebuyers as "high to very high," "average" or "low to very low."

Scores for each component are combined to determine a seasonally adjusted index; any number over 50 indicates that more builders view conditions positively rather than negatively.

In August, the HMI index tracking current sales conditions fell five points to 81 and the component measuring traffic of prospective buyers also dropped five points to 60. The gauge charting sales expectations over the next six months held steady at 81.

Looking at the three-month moving averages for regional HMI scores, the index measuring builder confidence in the Northeast fell one point to 74, the Midwest dropped two points to 68, the South sank three points to 82 and the West took a two-point tumble to 85.

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Why It Happened: Robert Deitz, chief economist at the NAHB, attributed the five-point decline in overall builder confidence to a confluence of rising home prices aggravated by the increased costs of construction materials, which in turn has been fueled by supply chain disruptions.

"While the demographics and interest for home buying remain solid, higher costs and material access issues have resulted in lower levels of home building and even put a hold on some new home sales," said Dietz. "While these supply-side limitations are holding back the market, our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions."

Photo: Paulbr75 /Pixabay.