NAHB/Wells Fargo Housing Market Index (HMI)

The NAHB/Wells Fargo Housing Market Index (HMI) is designed to gauge and track the pulse of the single-family housing market. The HMI is based on a monthly survey of single-family builders who are asked to rate three specific conditions of the housing market:

• Present sales of new single-family homes
• Expected sales of single-family homes for the next six months
• Traffic of prospective buyers of new single-family homes

Each month, the HMI depicts overall builder sentiment toward housing market conditions on a scale ranging between 0 and 100. A higher reading (>50) is an indication that the majority of builders feel confident about the current and near-term outlook for housing. Lower readings signify less optimism among builders.

HMI Key Findings: June 2024

Builder confidence in the market for new single-family homes was 43 in June, down two points from the previous month. The higher-for-longer interest rate environment continues to place significant downward pressure on builder sentiment and overall building conditions.

All three HMI components posted declines in June, and all are below the key threshold of 50 for the first time since December 2023.

• Current sales conditions fell three points to 48.
• Expected sales in the next six months dropped four points to 47.
• Traffic of prospective buyers declined two points to 28.

The June survey also revealed that 29% of builders cut home prices to bolster sales, the highest share since January 2024 (31%) and well above the May rate of 25%. However, the average price reduction in June held steady at 6% for the 12th straight month.

June 2024 HMI and Historical Data

• Table 1: NAHB/Wells Fargo National and Regional HMI – June 2024
• Table 2: NAHB/Wells Fargo National HMI – History
• Table 3: NAHB/Wells Fargo National HMI Components – History
• Table 4: NAHB/Wells Fargo Regional HMI – History
• Table 5: NAHB/Wells Fargo Regional HMI – 3-Month Moving Averages – History
• Chart: NAHB/Wells Fargo HMI and Single-Family Housing Starts

Methodology of the HMI

The HMI is a weighted average of the three components included in the monthly builder survey: present sales of new single-family homes, expected sales of single-family homes for the next six months, traffic of prospective buyers of new single-family homes. The weights are:

• .5920 for Present Sales
• .1358 for Expected Sales
• .2722 for Buyer Traffic

A panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low”. An index is calculated for each component by applying the formula “(good – poor + 100)/2” or, for Traffic, “(high/very high – low/very low + 100)/2”.

Each index created this way has several desirable properties that make it relatively easy to interpret. In particular, each index:

• Lies on a scale of 0 to 10
• Is 0 only when everyone says conditions are “Poor”
• Is 100 only when everyone says conditions are “Good”
• Is 50 when the % saying “Good” = the % saying “Poor”

Moreover, each percentage point shift from:

• Poor to Good raises the index by 1 point
• Good to Poor lowers the index by 1 point
• Fair to Good raises the index by 1/2 point
• Fair to Poor lowers the index by 1/2 point

The panel of builders to whom the survey is sent is stratified by region of the country and size of the builder. The panel is refreshed on an annual basis to ensure optimal response rates and balanced participation from builders across the country.

Key Factors That Can Impact the HMI

Interest rates have a significant impact on the overall housing market conditions. When mortgage rates are low, housing demand is high. However, when mortgage rates are high, it becomes more challenging for many Americans to afford a monthly mortgage payment for a home that suits their needs. As home prices rise, many would-be home buyers are pushed to the sidelines, leading to decreased demand in the housing market and a drop in builder sentiment, as illustrated in the HMI. Elevated interest rates also impact the cost of borrowing for builders and can affect their ability to obtain construction loans.

Employment rates are another factor that can impact the Housing Market Index. When the economy is strong and more people are employed, the housing market tends to be more robust. This is because stable employment provides the income security needed to qualify for and afford a mortgage. However, when the pace of economic growth is slow and unemployment rates are high, it can lead to decreased demand in the housing market, resulting in a drop in the HMI. High unemployment rates create uncertainty, making securing financing and purchasing real estate harder, and leading to a significant drop in buyer demand.

Material costs are a major factor for any home building project. Builders can typically anticipate when prices rise and fall with supply and demand. But when supply chains experience delays and prices become especially volatile, as they did in the wake of the COVID-19 pandemic, the uncertainty can lead to diminishing builder confidence.

Inflationary pressures are also contributing to higher material costs. When the general cost of goods and services rises across the economy, it inevitably impacts the price of construction materials and builder sentiment.

Significant Historical Readings of the HMI

History shows that the HMI has consistently reflected — and even predicted — periods of booms and busts in housing markets, as it was originally constructed to do.

1980s

The inaugural HMI survey in January 1985 showed a reading of 50, at a time when the annual rate of housing starts was around 1.7 million. The HMI series stayed within a relatively narrow band between 50 and 64 until the late 1980s when it began to decline due to problems in financial markets centered around the nation’s savings and loan industry.

1990s

During the resulting credit crunch and recession of the 1990s, the HMI dropped to 20 as annual housing starts declined to 1.0 million. The HMI and housing starts both began to recover shortly thereafter as the economy entered a period of sustained growth in the 1990s. In 1998 and 1999 the starts increased to 1.6 million and the HMI was consistently over 70.

2000s

From this high point, the HMI declined only modestly in the early 2000s, as the short recession caused by the .com bust and the turmoil resulting from the 9-11 attacks didn’t seem to slow the production of new housing much, if at all. By 2005 the HMI was back over 70 and annual housing starts surged to over 2.0 million.

Three years later, the financial market crisis emerged causing the Great Recession and an historic downturn in housing markets. The HMI hit its all-time low of 8 in January 2009, as housing starts dropped to a post-WWII low of around 0.5 million. Following the Great Recession, housing starts and the HMI recovered at a steady-but-very-slow pace.

2010s

Throughout much of the 2010s, the HMI generally remained within the mid-to-high 60s. The moderately strong results indicated that builders who managed to survive the Great Recession were doing reasonably well, thanks in large part to favorably low interest rates.

2020s

The HMI was particularly strong following the initial decline and rapid recovery associated with the COVID-19 pandemic, when interest rates were kept historically low. During this period, the HMI climbed to an all-time high of 90 in November of 2020, when starts had recovered to a rate of about 1.6 million per year. However, in the years that followed, rising interest rates and affordability challenges have increasingly stifled the housing market, as illustrated by HMI readings that have frequently fluctuated between the mid-30s and low-50s.

Early Validation of the HMI

In 1994, a peer-reviewed article published in the Journal of Real Estate Research by John Goodman (a research economist from the Federal Reserve Board of Governors) showed that the NAHB survey was the only one of several well-known attitude surveys that significantly helped predict housing market variables like starts. NAHB economists revisited John Goodman’s article more than a decade later and found that the HMI survey retained essentially the same ability to predict housing starts that it had in 1994.