With little competition, homebuilders are feeling better

March 15, 2023

Despite the volatile mortgage rate environment and overall economic uncertainty, homebuilder confidence slowly continues to rise, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report, released Wednesday.

In March, homebuilder sentiment in the market for newly built single-family homes rose two points from February’s reading, to an index value of 44. This is the third straight month of increases after a year of decreases.

The NAHB/HMI report is based on a monthly survey of NAHB members, in which homebuilders are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the homebuilder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.

The NAHB attributes the increase to the lack of existing home inventory shifting demand to the new home market. (The existing home sales market is significantly bigger than new homes.)

“Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers are waiting for interest rates to drop and turning more to the new home market due to a shortage of existing inventory,” Alicia Huey, the NAHB chairman, said in a statement.

Three other indices monitored by the NAHB had mixed results in March. The gauge measuring current sales conditions rose to 49, up two points month over month. The component analyzing sales expectations for the next six months rose one points to a reading of 41, and the index that charts traffic of prospective buyers rose three points from February to a reading of 31. This is the strongest traffic index reading since September of 2022.

“Given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook,” Huey said.

Although interest rates have decreased in recent days, affordability remains a concern for homeowners and homebuilders looking to acquire land.

“While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers,” Robert Dietz, the NAHB’s chief economist, said in a statement. “For example, 40% of builders in our March HMI survey currently cite lot availability as poor. And a follow-on effect of the pressure on regional banks, as well as continued Federal Reserve tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation. When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability.”

Regionally, the three-month moving averages for HMI rose in all four regions, with the West gaining four points to a reading of 34, the South rising five points to 45, the Northeast adding five points for a reading of 42 and the Midwest rising one point to a reading of 34.

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