Builder confidence for new single family homes has continued its decline in July. According to the National Association of Home Builders/Wells Fargo Housing Market Index, builder confidence for new single family homes has declined three additional points to 39.

The drop is attributed to increased concerns of interest rate increases and housing affordability, according to the NAHB.

The index measures builder perceptions of current new single-family home sales, and the expectations of builders for the next six months. The perceptions are rated "good, "fair" or "poor."

The scores are compiled and adjusted according to a seasonal index. Numers under 50 indicate that sales are considered poor.

"The HMI is down from its most recent cyclical high of 72 in June last year, and reflects growing builder uncertainty on the heels of reduced sales and increased cancellations related to eroding affordability as well as an ongoing withdrawal of investors/speculators from the market place," said NAHB Chief Economist David Seiders.

"But just as concerning to many builders is the potential for more monetary tightening by the Federal Reserve that could drive interest rates, and thereby homeownership costs even higher. Ironically, the Fed's inflation-fighting moves have helped firm up the rental market and raise the 'owners' equivalent rent' components of the core inflation measures that the Fed is seeking to contain."

All three indices fell this month, with the most dramatic fall occurring in the index which measures sales predictions for the next six months. This index fell from 51 to 46.

The index of current sales of new family homes fell four points to 43. The index of prospective buyer traffic decreased two points to 27.

The only region to experience an upturn in builder confidence was the South, up two points to 50. Yet, that mark remains well below the 77 score of June 2005. The index in the Northeast was down to 36, while the Midwest dropped to 21.

The West had the largest decline in confidence, down nine points to 51.

"In terms of historical comparison, the HMI's movement is essentially in line with readings from the 1994-95 period when the Federal Reserve tightened monetary policy and a fairly orderly cooling-down process occurred in the nation's housing markets," Seiders explained.

"That is what our forecasts anticipate happening in the current period, provided the downside risk of rising interest rates and a bail-out by investors/speculators do not become too pronounced," he said. "With respect to interest rates, we expect the Federal Reserve to maintain the current 5.25% target for the federal funds rate for some time, and we're projecting only modest increases for long-term interest rates from current levels."