With a renewed emphasis on new construction thanks to limited existing inventory, builder confidence rose five points in the NAHB/Wells Fargo Housing Market Index (HMI).
Despite building material supply chain disruptions and tightening credit conditions for construction loans, May 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 homeowners 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,” said NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama.
“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,” she added.
Derived from a monthly survey, 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.
For May, all three major HMI indices posted gains. The HMI index tracking current sales conditions rose five points to 56, the component following sales expectations in the next six months increased seven points to 57, and the gauge charting traffic of prospective buyers increased two points to 33.
The Midwest edged up two points to 39 in the three-month moving averages for regional HMI scores, while the South increased three points to 52, the West moved up three points to 41, and the Northeast held steady at 45.
“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.”
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:
- 27% of builders reduced home prices in May, down from 30% in April; 31% in February and March; and 36% last November.
- Unchanged for the past four months, the average price reduction remained at 6%.
- 54% of builders offered some type of incentive to bolster sales in May, down from 59% in April and 62% in December.
