A picture of a half-built home's interior.

Builder confidence posted a significant drop in May as affordability challenges dimmed expectations. The National Association of Home Builders/Wells Fargo Housing Market Index, which measures builder sentiment, fell in May for the fifth consecutive month and dropped to its lowest reading since June 2020.

Rising mortgage rates and higher building costs are taking most of the blame. Building material costs are up 19% compared to a year ago, the National Association of Home Builders reports. Buyers are concerned by borrowing costs—the 30-year fixed-rate mortgage averaged 5.3% last week, up 2.94% from a year ago, according to Freddie Mac. The monthly mortgage payment has increased by about $520 since the first week of January, when rates averaged 3.2%, according to a recent blog post at the National Association of REALTORS®.

Entry-level and first-time buyers who do not have another home to leverage for a new home may be feeling the impact of rising costs the most, builders say.

Home builder sentiment dropped across the board in May on measures of current single-family home sales, sales expectations for the next six months, and prospective buyer traffic.

“The housing market is facing growing challenges,” says Robert Dietz, chief economist of the National Association of Home Builders. “Based on current affordability conditions, less than 50% of new- and existing-home sales are affordable for a typical family.”

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