BAM Key Details:
- According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for June 2023, builder confidence in the market for newly-built single-family homes has climbed into positive territory for the first time since July 2022.
- The combination of solid buyer demand, the shortage of existing inventory, and improving supply chain efficiency boosted builder confidence by five points, raising it from 50 to 55, marking the sixth consecutive month of upticks in builder sentiment.
Builder confidence has officially climbed into positive territory, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which rose five points in June 2023 to 55.
Anything above 50 signifies general optimism among home builders. And this would be the sixth monthly increase in builder confidence in the market for newly-built, for-sale, single-family homes.
It’s also the first time the HMI has risen above 50 in 11 months (since July 2022).
Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains. 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.
Source: NAHB
Contributing factors and caveats
As to why builder confidence has been climbing, experts are crediting a combination of solid buyer demand, a shortage of existing inventory, and improvements in supply chain efficiency.
NAHB Chief Economist Robert Dietz also gives credit to buyers adapting to higher rates and to speculation that we’re getting closer to the end of interest rate hikes by the Federal Reserve.
A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year. 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 reminded Fed and Washington policymakers of the critical role of the state of homebuilding in taming inflation and stabilizing the economy.
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. 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.
On Tuesday’s Hot Sheet, Byron Lazine pointed out that in many markets, the supply chain is no longer the issue it once was.
A more significant obstacle is the lack of labor support, not to mention the minimal efforts on the part of governments (national and local) to incentivize the construction of more affordable housing—and specifically for-sale, single-family homes.
Builders are gradually pulling back on buyer incentives
Another sign of growing optimism among builders is the gradual pulling back on buyer incentives.
- 25% of builders lowered home prices to boost sales in June—down from 27% in May and 30% in April, continuing the steady decline from last November’s peak of 36%.
- Builders reduced prices by an average of 7% in June—down from 8% in December 2022.
- 56% of builders offered sales incentives to buyers in June—up from 54% in May but down from 62% in December 2022.
Based on the results of a monthly survey conducted by the National Association of Home Builders, the NAHB/Wells Fargo HMI gauges builder perceptions on three key components:
- Current single-family home sales
- Single-family home sales over the next six months
- Traffic of prospective buyers
Builders rate the first two as “good,” “fair,” or “poor,” and the third as “high to very high,” “average,” or “low to very low.”
Scores for each are then quantified and used to calculate a (seasonally adjusted) index of builder sentiment, where any number above 50 means more builders view market conditions as good than as poor.
Scores for all three of these components rose in June, with current sales climbing five points to 61, sales expectations over the next six months rising six points to 62, and traffic of prospective buyers growing four points to 37.
Three-month moving averages for regional HMI scores also showed increases across the board:
- Northeast—up two points to 47
- Midwest—up four points to 43
- South—up three points to 55
- West—up five points to 46
Takeaways for real estate agents
Builder confidence is now five points over the border between optimism and pessimism—which is good. But it doesn’t negate the widespread need for an increase in more affordable new construction.
All the more reason for you to know your local market better than anyone—including how much of available inventory is new construction and how much of that is affordable to median-income buyers. If that isn’t a priority in your area, see what you can do, on behalf of buyers in your community, to raise awareness among local government leaders.
