Builder confidence in housing market increases for fifth month

Builder confidence in the market for newly built single-family homes rose across the country in the past three months, including by two points in the Midwest, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

The three-month moving averages for regional HMI scores show the Midwest increased 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 points.

The new data was released on May 16 and shows confidence rose to 50 points. This marks the fifth straight month that builder confidence has increased. It is the first time 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,” NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, said in a news release. 

She said these trends are fueling cautious optimism among builders as they continue to face ongoing challenges to meet the increasing demands for new construction, including shortages of building materials. 

The tightening of credit conditions for residential real estate development and construction brought on by the actions of the Federal Reserve to raise interest rates is also a concern, Ms. Huey said.

“Lack of existing inventory continues to drive buyers to new construction,” NAHB Chief Economist Robert Dietz said in a release. “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 trend is opposite to 2022, when builder confidence declined every month

The importance of the HMI

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.
  • 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 over 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.