Sentiment in the Midwest Declined to the Lowest Level Since June 2020

• The NAHB Housing Market Index fell to 77 in April versus 79 in March.
• Responders saw declining current sale conditions, better future sale conditions and declining buyer traffic numbers.
• Pent-up housing demand and constrained inventories will continue to be the leading drivers of house price growth this year.

The National Association of Home Builders (NAHB) Housing Market Index edged down in April to 77 from 79 in March. The NAHB Index remains very strong, well above the 50-point threshold.

The NAHB Housing Market Index gauges builder sentiment among builders of single-family homes; a reading of above 50 indicates that more single-family homebuilders view conditions as positive while a reading of below 50 indicates that more single-family homebuilders view conditions as negative.

Details of the report were weak. The current sales conditions component which makes up 60% of the NAHB HMI edged down to 85 from 87 in March; the future (next six months) sales conditions component increased to 73 from 70 in March and the prospective buyers’ traffic component dropped to 60 from 66 in March. The prospective buyer traffic subcomponent is now at the lowest level since August 2021. Homebuilder confidence declined in the Midwest and the West and increased in the Northeast and the South. Homebuilder confidence in the Midwest is now at the lowest level since June 2020.

The sharp decline in the buyer traffic subcomponent reflects pressures from rising home prices and the quick rise in mortgage rates. However, homebuilder confidence remains on strong footing and has been well above the 50-point threshold since July 2020.  Homebuilders have benefitted from pandemic-driven demand and low borrowing costs in recent years, but the construction sector outlook is less positive. High inflation, labor shortages, and supply-chain disruptions will limit construction activity in the near term.

Additionally, increased borrowing costs as the Federal Open Market Committee tightens monetary policy, and expectations for higher interest rates are additional headwinds facing home builders. The demand-side fundamentals remain solid. Rising mortgage rates and the runup in prices in recent years will worsen affordability but pent-up demand from consumers will keep house price growth strong.  On balance, pent-up demand and constrained inventories will continue to be the leading drivers in the housing sector this year, resulting in another year of double-digit house price growth.

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