Builder confidence rose in May, but the 14th consecutive month of sales incentives shows affordability pressures have shifted from buyers to builders’ bottom lines.
Homebuilder confidence in the new single-family home market rose 3 points in May, reaching 37 on the NAHB/Wells Fargo Housing Market Index. It remains well below the 50 mark that separates good from bad. The last time the number exceeded 50 was in April 2024, when the number reached 51.
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That modest increase was compounded by familiar headwinds: persistently high mortgage rates, rising gas prices and economic uncertainty from the Iran war weighing on buyer demand. But the numbers getting the most attention from analysts this month aren’t the composite index. It’s an incentive.
From tactics to line items
For the 14th consecutive month, at least 60% of builders reported using sales incentives to move homes, according to the index. This series of moves has quietly reshaped what “builder concessions” mean in today’s market.
“Fourteen consecutive months of incentives means it’s not a tactical response to a weak quarter,” Spacial co-founder and CEO Maor Greenberg told Inman. “They are now a permanent item in the cost of selling a home.”
In fact, the percentage of builders who reduced prices in May fell to 32% from 36% in April, but the average price reduction increased from 5% to 6%. Builders who are cutting are cutting deeper, even though fewer contractors are reaching for the tools first.
“The numbers consistently tell us that affordability pressures are not going away,” Greenberg added. “It used to be a household-side problem that suppressed demand. Now it’s a supply-side problem that compresses profit margins. The number to watch is incentives. When the market improves, this number will be the first to disappear.”
Not bad and good are not the same thing
All three HMI components rose in May, which NAHB attributes in part to purchasers who had previously been on the sidelines deciding to move in the spring. The index measuring current sales rose three points to 40. The index for future sales rose 3 points to 45. Prospective buyer traffic increased by 3 points to 25, still in significantly negative territory.
“For most of the past three years, HMI has been below 50,” Greenberg said. “An increase of three points means nothing. It shows that conditions are not worse than before, but it does not mean that conditions have improved.”
Robert Dietz, chief economist at NAHB, expressed similar caution. “Recent increases in long-term interest rates will continue to dampen homebuyer demand,” Dietz said. He noted some bright spots in some regions, particularly parts of the Midwest, but characterized the overall market as facing “significant affordability challenges.”
Midwest maintains, West slides
Regional fragmentation further intensifies this division. Looking at the three-month moving average, the Midwest rose one point to 43, and the Northeast rose one point to 42. Both regions are higher than the South (which remained unchanged at 35) and significantly higher than the West (which dropped by 1 point to 28).
Greenberg linked the West’s persistent underperformance to forces beyond the housing market itself. “The West Coast is more sensitive to high-tech employment and immigration patterns,” he says. “The West Coast numbers accurately reflect the current state of the technology sector, which has been volatile for the past few years and remains in a period of uncertainty.”
Problems that Congress cannot solve
Bill Owens, president of NAHB, a home builder and remodeler in Worthington, Ohio, cited pending legislation as a potential relief. He noted that continued work in the House of Representatives on amendments to the 21st Century Housing Act “could help increase the nation’s housing supply and ease the concerns of builders.”
On the cost front, no matter what Congress does, builders are enduring pressures that won’t go away anytime soon. Lot costs, labor availability, and permitting schedules are all long-term, and Greenberg argues that these constraints are fundamentally different from materials inflation, which at least tends to be cyclical.
“Land ownership takes many years, five years is common,” he says. “There’s more labor lock-in. Trade relies on migrant workers, immigration policies have been unfavorable in recent years. Permits are taking longer. All of these things add up.”
The NAHB/Wells Fargo HMI is based on monthly surveys conducted by the association for more than 40 years. It measures builders’ perceptions of current single-family home sales and sales expectations for the next six months, and scores each factor on a seasonally adjusted scale, with 50 as the dividing line between expansion and contraction.
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