Here’s a simple formula: Limited housing inventory equals increased interest in new home construction
According to the National Association of Home Builders Housing Market Index for May, builders are confident that buyers will be knocking on their (new) doors. Builder confidence rose 5 points to 50.
“Limited existing inventory, which has put a renewed emphasis on new construction, resulted in a solid gain for builder confidence in May,” said Robert Dietz, NAHB Chief Economist. “Even as the industry continues to face several challenges, including building material supply chain disruptions and tightening credit conditions for construction loans.
50 Is an Important Milestone
According to the NAHB/Wells Fargo Housing Market Index report for May, builder confidence in the market for newly built single-family homes in May rose five points to 50. 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.
“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,” Dietz explained. “In March, 33% of homes listed for sale were new homes in various stages of construction.”
By comparison, from 2000-2019 the average percentage of new homes (of all homes listed for sale) was a 12.7% average, Dietz said.
Prospective Buyers Looking at New Construction?
Does that mean that prospective buyers will be significantly considering new construction?
“While this is fueling cautious optimism among builders, they continue to face ongoing challenges to meet a growing demand for new construction,” Dietz said. “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.”
Dietz pointed out that interest rates have more than doubled since 2021. Yet even with the increase in interest rate, the HMI survey shows that incentives (from builders) are playing a key role in attracting buyers.
However, the use of that type of sales inducement is gradually slowing, Dietz said. The share of builders reducing home prices dropped to 27% in May, down from 30% in April, 31% in Feb. and March, and 36% last November.
The average price reduction remains at 6%, unchanged for the past four months.
54% offered some type of incentive to bolster sales in May, down from 59% in April and 62% last December.
Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
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.
For an indepth look at the HMI report, go to NAHB.
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