BAM Key Details:
- After homebuilder sentiment in February saw the biggest improvement in a decade, builder confidence edged higher in March.
- The NAHB/Wells Fargo Housing Market Index (HMI) rose two points to 44, marking the third consecutive monthly increase in builder sentiment levels.
Buyers who can’t afford to wait for mortgage rates to drop any further are having a tough time finding existing homes—or competing with more affluent buyers for available inventory.
Turns out that’s not bad news for everyone.
According to the NAHB/Wells Fargo Housing Market Index (HMI), homebuilder sentiment on the market for newly-built single-family homes rose two points to 44 in March, marking the third consecutive monthly increase.
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. But given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook.
Source: NAHB
While high construction costs (partly due to supply chain issues) and elevated interest rates still present a challenge to housing affordability, homebuilders expressed cautious optimism.
That said, uncertainty about interest rates and the banking system remains. And many builders are still having to reduce prices or offer concessions (or both) to entice home buyers.
Why the (cautious) optimism?
According to HMI survey results, home sales during the past two months have exceeded home builders’ expectations. Much of that has to do with the continued use of incentives and price discounts on the part of builders, 31% of whom said they reduced prices in March—the same as in February but lower than the 36% who reported doing the same last November.
Also, 58% provided some type of concession to buyers in March, a slight increase from the 57% who did so a month ago but fewer than the 62% who offered incentives last December.
With the speculation surrounding this month’s FOMC meeting, the tentative optimism among home builders could either blossom (with an increase in buyer demand) or deflate with further challenges to new construction and housing affordability.
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. 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 Fed 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.
The NAHB/Wells Fargo Housing Market Index (HMI)
Data for the NAHB/Wells Fargo HMI is based on a monthly survey conducted by the NAHB. For more than 35 years, the survey has asked builders to rate the following to provide a monthly snapshot of builder sentiment on the housing market:
- Current Home sales and sales expectations for the next six months—rated as “good,” “fair,” or “poor.”
- Traffic of prospective buyers—rated as “high to very high,” “average,” or “low to very low.”
Scores for each component of the survey are used to calculate a seasonally adjusted index ranging from zero to 100, with any number over 50 signifying that builders who have a positive view of housing market conditions outnumber those who don’t.
Here are some of the results, broken down by category:
- Current sales conditions in March—up two points to 49
- Sales expectations for the next six months—down one point to 47
- Prospective buyer traffic—up three points to 31, the strongest traffic score since last September.
Looking at three-month moving averages for regional HMI ratings—
- Northeast—up five points to 42
- Midwest—up one point to 34
- South—up five points to 45
- West—up four points to 34
NAHB is expecting weaker housing conditions to persist in 2023, and we forecast a recovery coming in 2024, given the existing nationwide housing deficit of 1.5 million units and future, lower mortgage rates anticipated with the Fed easing monetary policy in 2024.
For more information, you can review the HMI tables and subscribe to Housing Economics PLUS.
Top takeaways for real estate agents
If home builders in your market are dishing out concessions to entice cash-strapped home buyers, that’s information worth passing on to your clients and community. Add it to the list of resources you can recommend to prospective buyers who can’t afford to wait for lower mortgage rates.
Who knows how much money you could save buyers in your area on a brand new home with no major (read “expensive”) issues to deal with.
Contacting specific builders in your area can also lead to professional relationships that benefit prospective buyers in your area as well as home builders with a strong track record.
