Homebuilder sentiment has taken a noticeable hit, with the Housing Market Index (HMI) plummeting five points from January to a reading of 42. This drop signals negative sentiment in the industry, given that any reading below 50 indicates dissatisfaction. The decline in sentiment reflects a combination of factors affecting the housing market. Builders are grappling with high mortgage rates, rising costs, and a lean inventory of existing homes.
The HMI's three components—current sales conditions, buyer traffic, and sales expectations—have all shown concerning trends. Current sales conditions dropped four points to 46, while buyer traffic decreased by three points to 29. Most notably, sales expectations for the next six months plunged 13 points to 46, marking the lowest level since December 2023. The average rate on a 30-year fixed mortgage hovered above 7% for January and February, contributing significantly to buyer hesitation.
Builders are also bracing for higher costs due to tariffs imposed by President Donald Trump on Canada and Mexico. Despite these challenges, the share of builders lowering prices fell to 26% in February, the lowest since May 2024. Other sales incentives have similarly decreased. Single-family housing starts continue to trend lower than the previous year, exacerbating the pressure on homebuilders.
NAHB Chairman Carl Harris commented on the situation:
"While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI."
The market's struggle is further compounded by a lean supply of existing homes for sale and escalating home prices. These factors continue to weaken affordability, undermining potential buyer interest. Ryan Marshall, CEO of PulteGroup, elaborated on the impact of financial conditions:
"Despite Federal Reserve actions to lower short-term interest rates, mortgage interest rates remained elevated in the fourth quarter, which impacted buyer demand as homebuyers continue to face affordability challenges."