Market headwinds are taking their toll on builder sentiment. Increasing mortgage rates, labor shortages and continued material challenges are proving to be roadblocks to home construction this summer, and homebuilders are feeling the effects.

The National Association of Home Builders’ (NAHB) monthly confidence index reported a nearly record-level drop in sentiment in July. The index plunged 12 points to an interval level of 55, the lowest reading since May 2020. This is also the second largest decline recorded in the index’s history and the seventh straight month of decline.

This index considers any reading over 50 to be of positive sentiment and reflects an overall confident attitude from builders. In comparison, the index stood at 80 at the same time last year. Other indicator readings measured on NAHB’s index were also down from last month. Conditions of current sales and potential buyer traffic both dropped 11 points to 50 and 37, respectively.

The overall housing market is showing signs of slowing after nearly two years of frenzied activity. Buyers are increasingly pausing their home search as they grapple with increased monthly payments due to rising interest rates and a tight inventory of homes for sale.

Robert Dietz, NAHB’s chief economist, noted that these affordability and availability concerns are front of mind for many buyers. “Affordability is the greatest challenge facing the housing market,” said Dietz. “Significant segments of the homebuying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing.”

Homebuilders are adjusting production of new homes to meet this new market landscape. New home construction nationwide was down 3.1% in June from the previous month, according to the U.S. Census Bureau. In the Twin Cities metro, permits for new single-family homes were down 33% in July compared to the previous year.