Builders’ confidence in the new home construction market increased for the sixth straight month.
That’s according to the Housng Market Index calculated by the National Association of Home Builders/Wells Fargo.
Contributing Factors to the HMI Increase
Solid demand, a lack of existing inventory and improving supply chain efficiency helped increase builder confidence, according to the report. At the same time, builders and developers are finding it increasingly difficult to obtain loans, according to NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama.
“Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains,” Huey said. “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.”
Mortgage Rates, Inflation and the US Monetary Policy
NAHB Chief Economist Robert Dietz pointed out that despite the increase in interest rates, buyers are still shopping for new homes. And, he said, the state of the home building market is a critical component of the inflation outlook.
“A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” Dietz said. “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,” he added.
Small Business Deals
Dietz further noted the Fed and Washington policymakers must factor into consideration how the state of home building is critical for the inflation outlook and the future of monetary policy.
Increases in the Cost of Shelter
“Shelter cost growth is now the leading source of inflation,” Dietz continued. “Such costs can only be tamed by building more affordable, attainable housing – for-sale, for-rent, multifamily and single-family.”
What Can Policymakers Do?
Dietz said that policymakers can help in three ways:
- Address supply chain issues
- Take steps to eliminate the construction industry’s shortage of skilled workers
- Reduce or eliminate inefficient regulatory policies, such as exclusionary zoning
Builders Pulling Back on Sales Incentives
And in another sign of gradual optimism for the state of demand for single-family homes, the June HMI survey shows that overall, builders are gradually pulling back on sales incentives:
- 25% of builders reduced home prices to bolster sales in June. The share was 27% in May and 30% in April. It has declined steadily since peaking at 36% in November 2022.
- The average price reduction was 7% in June, below the 8% rate in December 2022.
- 56% of builders offered incentives to buyers in June, slightly more than in May (54%), but fewer than in December 2022 (62%).
Derived from a monthly survey that NAHB has been conducting for more than 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 June. The HMI index gauging current sales conditions rose five points to 61, the component charting sales expectations in the next six months increased six points to 62 and the gauge measuring traffic of prospective buyers increased four points to 37.