Builders growing more confident heading into the summer months
After a year of declining confidence in 2022, homebuilder optimism is on the rise, driven by buyer demand that is outpacing the supply of existing homes.
- The latest NAHB confidence index rose five points to 50, the highest level since July 2022.
- Confidence continues to rise even in the face of supply chain issues and tightening credit.
- A key factor is demand: Potential sellers of existing homes are holding onto their ultra-low mortgage rates, keeping inventory constrained.
Despite ongoing supply chain issues and tightening credit, homebuilders are becoming more confident about the market heading into the summer months.
The National Association of Home Builders' latest confidence survey index rose five points to 50 between April and May, marking the fifth straight month of gains. It's the first time the confidence survey hit the midpoint of the index since July 2022. At that time, confidence was declining, and in fact fell every month in 2022, bottoming out at 31 in December.
New home construction is taking an increasingly sizable role in the current market because so many potential sellers are holding onto their ultra-low locked-in mortgage rate, said Robert Diez, chief economist at the NAHB. He noted that 33% of homes currently listed for sale were in some stage of construction, a significant increase over historical averages. Between 2000-2019, the average market share for newly constructed homes was 12.7%.
"With limited available housing inventory, new construction will continue to be a significant part of prospective buyers' search in the quarters ahead," Dietz said in a blog post.
In an email, Dietz noted that growing certainty about the Federal Reserve's position on interest rates is also helping build confidence.
But a factor that could sway builder confidence is the health of community and regional banks, which remain under a lot of stress as interest rates remain elevated. About 85% of builders receive financing through these banks, he said.
"If that financing becomes scarcer or at higher rates, we could face future lot shortages," Dietz said.
While this demand for inventory is fueling cautious optimism, the industry still faces several challenges, said NAHB Chairman Alicia Huey.
"These include shortages of transformers and other building materials and tightening credit conditions for residential real estate development and construction brought on by the actions of the Federal Reserve to raise interest rates," Huey said.
Tougher immigration rules are also creating a shortage of construction workers, according to a recent report from NBC News.
Broken down by region, the West had the biggest one-month jump in the confidence index, rising eight points to 48 in May. The South had the highest index number, rising five points to 55. The Midwest rose two points to 42, while the Northeast ticked up a point to 45.
With more demand, the share of builders reducing home prices dropped to 27% in May, down from 30% in April, according to the survey. The share of builders opting for price reductions has steadily dropped since November, when it was at 36%.
The average price reduction was 6% in May, which is unchanged from the first four months of 2023. The survey also found that 54% of builders offered some type of incentive to boost sales in May, down from 59% in April and 62% in December.