Frustrated by slow sales and stubbornly high construction costs, U.S. home builders reported declining market outlooks in July as the housing market turned the corner into the second half of 2026.

In their jointly produced Housing Market Index (HMI) published Thursday, the National Association of Home Builders (NAHB) and Wells Fargo said measures of current and future sales conditions both worsened in July, the first month of the third quarter.

As the overall builder confidence index fell two points to 34 in July, the component index tracking current sales conditions slid one point lower to 37. Meanwhile, the index measuring six-month sales expectations shed two points to 43 and the index tracking traffic of prospective buyers recorded a two-point drop to 23.

“With the HMI below 40 for 15 straight months, affordability remains the home building industry’s primary challenge, as elevated mortgage rates, costly land, rising material prices, and persistent skilled labor shortages continue to affect the market,” wrote Robert Dietz, chief economist at the NAHB, in market commentary published Thursday.

The HMI uses 50 as the dividing line between majority-positive and majority-negative market sentiment, and the index has not exceeded that threshold since April 2024.

New-home sales have struggled to gain momentum this year, contributing to a downturn in single-family housing starts as builder backlogs have grown. High home prices and mortgage rates that rose amid inflationary pressures from the Iran war weakened purchase affordability through the spring.

“Looking ahead, the newly enacted 21st Century ROAD to Housing Act is a positive step that will help expand housing supply and lower overall housing costs,” added Dietz, “although more policy change is needed at the state and local level.”

Experts within the home building industry say broader economic uncertainty has undermined homebuying confidence and remains the largest impediment to buyer demand. Builders have responded by leaning on sales incentives like price cuts, closing cost assistance and mortgage rate buydowns.

Use of sales incentives increased slightly in July, the NAHB said in the report, describing the expansion as “signs of cooling.” The percentage of builders who reported using any sales incentive rose to 63% from 62% in June, while the share who reported lowering prices in July rose to 37% from 35% the prior month.

July marked the 16th consecutive month that the share of builders reporting the use of sales incentives has been 60% or higher, the NAHB said.

Despite new-home mortgage demand declining from May levels, new-home sales rose to a three-month high in June, according to the Mortgage Bankers Association, fueled by higher use of sales incentives, the trade group reported.

Government estimates of new-home sales activity in June have not yet been published, though the most recent data showed new-home sales plunged in May to nearly 7% below a year ago.