Are we on the verge of a construction downturn?

“There are many aspects in play which are contributing to what some are referring to as a housing recession,” he told MPA. “Most of the causes are due to inflation; mortgage rates have shot up this year, building material prices are still high, and we have seen a 54.7% increase in new home prices since the start of 2019.” What’s more, he added: “The Housing Market Index, carried out by the NAHB [National Association of Home Builders], has seen a year low point of 49 in August on their 100-point builder confidence scale. This is a drop from 83 back in January of this year. This is a huge indicator of what home builders themselves believe the state of current construction is in, and the trajectory it is taking this year.”

The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market according to the association’s website. The survey asks respondents to rate market conditions for the sale of new homes at the present time, and in the next six months, as well as the traffic of prospective buyers of new homes.

A rather sophisticated measure, the HMI is a weighted average of three separate component indices: present single-family sales, single-family sales for the next six months, and traffic of prospective buyers. Each month, 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 series by applying the formula “(good – poor + 100)/2” or, for traffic, “(high/very high – low/very low + 100)/2.” Each resulting index is first seasonally adjusted, then weighted to produce the HMI. The weights are .5920 for present sales, .1358 for sales for the next six months, and .2722 for traffic. The weights were chosen to maximize the correlation with starts through the following six months.

The HMI can range between 0 and 100.