Housing Market Dips in Early March 2022

The NAHB/Wells Fargo Housing Market Index (HMI) recorded a slight decline in early March 2022, per preliminary data released on March 16, 2022. The preliminary national HMI for March was 79, down from a revised value of 81 for February. After hitting a recent low of 75 in August 2021, the HMI peaked at 84 in December 2021. Since the housing sector is a significant factor in overall U.S. economic activity, the HMI is widely used as a key economic indicator.

The HMI results from a monthly survey of National Association of Home Builders (NAHB) members. The NAHB states that the HMI "is designed to take the pulse of the single-family housing market." Respondents rate current market conditions for the sale of new homes, forecast these conditions over the next six months, and assess the amount of traffic from prospective buyers of new homes.

Lumber Supply and Pricing Issues

On March 14, 2022, NAHB Chairman Jerry Konter urged the Biden administration to increase domestic production of timber from federal lands and to work with Canada on a new softwood lumber agreement that will eliminate tariffs. Konter indicated that home building material costs have risen by 20% on a year-over-year basis. He added that, since August 2021, the price of framing lumber has more than tripled, and the price of oriented strand board (OSB) has doubled.

Konter told participants in the session that lumber production has not kept pace with demand despite record high lumber prices and that tariffs are raising costs for builders and home buyers alike. He noted that, in October 2021, domestic lumber production was only 0.4% higher than in the previous year. He added that it is lower today than in 2018, despite increased demand. Moreover, he observed that domestic sawmill employment rose by only 500 jobs last year despite historically high lumber prices.

Konter warned, "Historically high price levels for lumber and other building materials are dramatically affecting home prices and rental costs and threaten the nation's economic stability." He added, "These supply chain price increases have only added to the ongoing housing affordability crisis."

HMI Components

The NAHB/Wells Fargo 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.

The Present Single-Family Sales index had a preliminary value of 86 in March. This was down from 89 in the past two months and from a recent high of 90 reached in December 2021.

The Single-Family Sales for the Next Six Months index had a preliminary value of 70 in March. This was down sharply from 80 in February and was the lowest reading since 79 in June 2021. The value of this index during the last three months of 2021 ranged from 84 to 85, then fell to 82 in January.

The Traffic of Prospective Buyers index had a preliminary value of 67 in March, up from a revised value of 65 for February. The recent peak for this measure was 71 in December 2021.

Regional Indexes

In addition to the national figure cited above, the HMI also is computed for four regions: Northeast, Midwest, South, and West.

Comparing the preliminary March 2022 figures to the revised February 2022 numbers, there was a sharp weakening in the Northeast (60 vs. 76) and a lesser decline in the South (80 vs. 84) but strengthening in the Midwest (73 vs. 71) and no change in the West (stable at 91).

Comparing the preliminary March 2022 figures to three-month moving averages, two regions showed weakening: the Northeast (60 vs. 69) and the South (80 vs. 83). Slight increases in strength were recorded in the Midwest (73 vs. 72) and the West (91 vs. 90).

HMI Methodology

Each month, a panel of NAHB member builders rates the first two components (Present Single-Family Sales and Single-Family Sales for the Next Six Months) on a scale of "good," "fair," or "poor."

The panel rates the last component (Traffic of Prospective Buyers) 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 housing starts during the following six months.