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Home builders losing confidence in recovery

After three months of holding out steady hope, sentiment among U.S. home builders weakened slightly in May. A monthly index from the National Association of Home Builders slipped one point from a downwardly revised April figure. The index now stands at 45. Anything above 50 is considered positive sentiment.

A worker uses a saw on a roof while building a new home at the Toll Brothers Inc. Baker Ranch community development in Lake Forest, California, Feb. 11, 2014.
Patrick T. Fallon | Bloomberg | Getty Images
A worker uses a saw on a roof while building a new home at the Toll Brothers Inc. Baker Ranch community development in Lake Forest, California, Feb. 11, 2014.

"It is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery," said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del. "However, builders expressed some optimism that sales will pick up in the coming months."

Builder confidence had moved well into positive territory throughout much of 2013, as prices soared on investor demand at the low end of the market. Home sales this spring have been decidedly weaker, as investors slow their purchases, leaving the market to mortgage-dependent, owner-occupant buyers.

Read More US foreclosures fall in April even as banks reclaim more homes: RealtyTrac

Of the three NAHB index components, sales expectations over the next six months rose one point to 57, and buyer traffic increased two points to 33. The component gauging current sales conditions fell two points to 48.

"Builders are waiting for consumers to feel more secure about their financial situation," said NAHB Chief Economist David Crowe. "Once job growth becomes more consistent, consumers will return to the market in larger numbers and that will boost builder confidence."

Read MoreDrop in rates spurs mortgage refinances

Confidence and affordability continue to hamper the housing recovery, but a severe shortage of homes on the market is also keeping sales transactions low and prices high. Home builders are not picking up much, still operating at about half the normal rate of demand. Builders say they are facing a tight land market, in addition to higher costs for materials and skilled labor.

On the bright side, as home values rise, more sellers are listing their homes. Inventories rose slightly in the last two months, and that could help ease the shortage.

"The worst in inventory is over," said Lawrence Yun, chief economist for the National Association of Realtors, speaking at an annual Realtor conference in Washington, D.C. But he admitted, "We need more production of homes, yet home production is dragging its feet."

- By CNBC's Diana Olick

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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