Builder confidence in the single-family market slipped three more notches to 39 in July, as interest rates and housing affordability continued to worry builders, according to an industry index released Tuesday.

The NAHB/Wells Fargo Housing Market Index (HMI), which is derived from a monthly survey of builders that gauges builder perceptions of current and future home sales and traffic of prospective buyers, sank for the fifth consecutive month amid softening market conditions. Scores for each component are used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes fell in July. The largest decline was in the index gauging sales expectations for the next six months, which fell five points to 46. The index gauging current sales of new single-family homes fell four points to 43, and the index gauging traffic of prospective buyers fell two points to 27.

“The HMI is down from its most recent cyclical high of 72 in June of last year, and reflects growing builder uncertainty on the heels of reduced sales and increased cancellations related to eroding affordability, as well as an ongoing withdrawal of investors/speculators from the marketplace,” said NAHB Chief Economist David Seiders. “But just as concerning to many builders is the potential for more monetary tightening by the Federal Reserve that could drive interest rates, and thereby home-ownership costs, even higher.”

Builders in the West region, who have been the most optimistic in the HMI for some time, recorded the biggest dip in confidence this time around, with a nine-point decline to 51. Builders in the Northeast posted a five-point decline to 36, and builders in the Midwest posted a four-point decline to 21. The HMI for the large South region edged up two points to 50, although this measure still is down considerably from a cyclical high of 77 in June of last year.

“In terms of historical comparison, the HMI’s movement is essentially in line with readings from the 1994-95 period when the Federal Reserve tightened monetary policy and a fairly orderly cooling-down process occurred in the nation’s housing markets,” Seiders said. “That is what our forecasts anticipate happening in the current period, provided the downside risks of rising interest rates and a bail-out by investors/speculators do not become too pronounced.”

NAHB expects the Federal Reserve to keep the federal funds rate at 5.25 percent for a while, and is “projecting only modest increases in long-term interest rates from current levels,” Seiders said.

HMI tables can be accessed online at www.nahb.org/hmi.

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