Builder confidence inched higher in July as low existing inventory continues to support demand for new homes. Despite the improvement in confidence month over month, rising mortgage rates, elevated construction costs, and limited lot availability remain large concerns for home builders, according to the NAHB/Wells Fargo Housing Market Index (HMI).
Builder confidence in the market for newly built single-family homes posted a one-point improvement to 56 in July. This marks the seventh straight month that builder confidence has increased and marks the highest level since June of last year, according to the NAHB.
“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” says NAHB chairman Alicia Huey. “At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”
While builder confidence remains in positive territory—an index reading over 50 indicates that more builders view conditions as good than poor—NAHB chief economist Robert Dietz says the quarter-point rise in mortgage rates over the past month is a “stark reminder of the stop-and-start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle.”
“There’s been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backward,” Dietz says. “More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.”
Limited resale inventory and the subsequent interest in newly built homes has provided market stabilization, and builders’ use of sales incentives declined in July, according to the HMI survey. Only 22% of builders reported cutting prices in July, down from 25% in June and 27% in May.
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 used to calculate a seasonally adjusted index where any number over 50 indicates more builders view conditions as good than poor.
The HMI index gauging current sales conditions in July improved one point to 62, the component tracking sales expectations in the next six months fell two points to 60, and the gauge measuring traffic of prospective buyers improved three points to 40, the highest reading since June 2022. According to the NAHB, the decline for future sales expectations is a reminder that housing affordability remains challenged by elevated interest rates.
Three-month regional moving averages all posted gains in July. The Northeast improved five points to 52, the Midwest increased two points to 45, the South rose three points to 58, and the West posted a five-point improvement to 51.
