Builder confidence has moved into positive territory for the first time in 11 months, rising five points to 55, according to the NAHB/Wells Fargo Housing Market Index (HMI). This marks the sixth straight month of increased builder confidence and the first month for sentiment levels to surpass the midpoint since July 2022.
The NAHB attributed this continued positive shift to solid demand, a lack of existing inventory, and improving supply chain efficiency.
“Builders are feeling cautiously optimistic about market conditions given low levels of existing-home inventory and ongoing gradual improvements for supply chains,” said NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama. “However, access for builder and developer loans has become more difficult to obtain over the last year, which will ultimately result in lower lot supplies as the industry tries to expand off cycle lows.”
According to the NAHB, another sign of gradual optimism for single-family home demand is that builders are starting to pull back on incentives. In June, only one-quarter of builders reduced home prices to bolster sales—down from November 2022’s peak of 36%. In addition, 56% of builders offered buyer incentives in June, which was up slightly from May but down from December’s 62%. The average price reduction in June was 7%, a drop from December’s 8% rate.
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 June, all three major HMI indices posted gains. The HMI index tracking current sales conditions rose five points to 61, the component measuring sales expectations in the next six months increased six points to 62, and the gauge following traffic of prospective buyers increased four points to 37.
Three-month moving averages for regional HMI scores also saw gains. The Northeast increased two points to 47, the Midwest rose four points to 43, the South edged three points to 55, and the West moved five points to 46.
“A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” said NAHB chief economist Robert Dietz. “This month marks the first time in a year that both the current and future sales components of the HMI have exceeded 60, as some buyers adjust to a new normal in terms of interest rates. The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans.”
Dietz also shared that the Fed and policymakers need to take into consideration home building’s impact on the inflation outlook and the future of monetary policy.
“Shelter cost growth is now the leading source of inflation, and such costs can only be tamed by building more affordable, attainable housing—for-sale, for-rent, multifamily, and single-family,” he noted. “By addressing supply chain issues, the skilled labor shortage, and reducing or eliminating inefficient regulatory policies, such as exclusionary zoning, policymakers can play an important and much-needed role in the fight against inflation.”
