Construction workers work on a home as a home subdivision is built in San Marcos, California, January 31, 2023.
Mike Blake | Reuters
Homebuilders are getting a big boost from the lack of existing homes for sale, which seems to outweigh some of the challenges they face in the financial markets.
Builders’ confidence in the newly built single-family home market rose 5 points to 50 in May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). It is the fifth consecutive month of gains and the first reading of builder sentiment since July that was not negative, which would be a reading below 50. Sentiment stood at 69 in May last year.
“New home construction is taking on a bigger role in the market as many homeowners with loans well below current mortgage rates choose to stay, and this keeps the supply of existing homes at a very low level,” said NAHB President Alicia Huey, a homebuilder from Birmingham, Alabama, in a release.
Huey noted that builders still face challenges in meeting growing demand. Although the price of wood has fallen since March, there are still shortages of building materials and tighter credit conditions for residential development and construction due to the recent banking crisis and higher interest rates.
Among the three components of the index, current sales conditions increased 5 points to 56, sales expectations in the next six months increased 7 points to 57, and buyer traffic increased 2 points to 33.
Builders are taking advantage of a very tight existing home market. New listings fell nearly 22% year-over-year in April, according to Realtor.com. Now that mortgage rates have doubled from a year and a half ago, some potential sellers may be reluctant to move to another home at a higher rate.
“In March, 33% of homes for sale were new construction homes in various stages of construction. That share averaged 12.7% from 2000-2019. With a limited housing stock available, new construction will continue to make up a significant portion of potential buyers “Look in the coming quarters,” said Robert Dietz, NAHB chief economist.
Homebuilders also attracted more buyers by offering incentives such as lowering mortgage rates. However, they seem to be declining and demand is growing.
The proportion of builders who lowered house prices fell to 27% in May, down from 30% in April, 31% in February and March and 36% last November. While just over half of builders still offer some sort of sales incentive, the share is down from 62% in December last year.
Regionally, on a three-month moving average, builder confidence in the Northeast was unchanged at 45. Sentiment in the Midwest was up 2 points to 39. In the South it was up 3 points to 52 and in the West it was up 3 points up to 41.