Limited Existing Inventory Boosts Builder Confidence
Limited existing inventory, which has put a renewed emphasis on new construction, resulted in a solid gain for builder confidence in May even as the industry continues to face several challenges, including building material supply chain disruptions and tightening credit conditions for construction loans.
The data for May
Builder confidence in the market for newly built, single-family homes in May rose five points to 50, according to the National Association of Home Builders/Wells Fargo Housing Market Index. This marks the fifth straight month that builder confidence has increased and is the first time that sentiment levels have reached the midpoint mark of 50 since July 2022.
With interest rates more than doubling from 2021, the HMI survey shows incentives have played a key role in attracting buyers in this new economic climate and that the use of these sales inducements are gradually slowing across the board:
- The share of builders reducing home prices dropped to 27% in May, down from 30% in April, 31% in February and March, and 36% last November.
- The average price reduction remains at 6%, unchanged for the past four months.
- Some type of incentive to bolster sales (54%) was offered in May, down from 59% in April and 62% last December.
HMI Indices results
All three major HMI indices posted gains in May. The HMI index gauging current sales conditions rose five points to 56, the component charting sales expectations in the next six months increased seven points to 57 and the gauge measuring traffic of prospective buyers increased two points to 33.
Looking at the three-month moving averages for regional HMI scores, the, the Midwest edged up two points to 39, the South increased three points to 52 and the West moved three points higher to 41. The Northeast held steady at 45.
NAHB’s take on the data
“New home construction is taking on an increased role in the marketplace because many home owners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level,” says NAHB Chairman Alicia Huey. “While this is fueling cautious optimism among builders, they continue to face ongoing challenges to meet a growing demand for new construction. 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.”
“Lack of existing inventory continues to drive buyers to new construction,” says NAHB Chief Economist Robert Dietz. “In March, 33% of homes listed for sale were new homes in various stages of construction. That share from 2000-2019 was a 12.7% average. With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead.”