Home Builder Sentiment Positive After 11-Month Hiatus

The latest Builder Confidence reading moved ahead 5 points.

The continued lack of existing housing inventory and solid demand for new homes has helped push builder confidence into positive territory for the first time in 11 months.

Builder confidence in the market for newly-built single-family homes in June rose five points to 55, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. 

This marks the sixth straight month that builder confidence has increased and is the first time that sentiment levels have surpassed the midpoint of 50 since July 2022.

A year ago, the HMI fell two points in June 2022 to a reading of 67. At the time, the reading marked the sixth straight monthly decline and the lowest HMI reading since June 2020.

Helping to move the needle forward this June is an improvement in supply chain efficiency, the NAHB said.

“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, Ala. “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.”

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%).

“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. 

Dietz noted that 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 said 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.

“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 said. “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.”

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.

Looking at the three-month moving averages for regional HMI scores, the Northeast edged up two points to 47, the Midwest increased four points to 43, the South moved three points higher to 55 and the West posted a five-point gain to 46.

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.

HMI tables can be found at nahb.org/hmi.