May Builder Confidence Improves to ‘Normal’

WASHINGTON – Limited existing-home inventory has placed a renewed emphasis on new construction. The result: A solid gain for builder confidence in May, even though the industry continues to face several challenges, including building material disruptions and tightening credit conditions.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for May, builder confidence in the market for newly built single-family homes rose five points to 50. It’s the fifth month in a row for an increase, and the first time it’s been out of negative-attitude territory since July 2022.

“New home construction is taking on an increased role in the marketplace because many homeowners with loans well below current mortgage rates are electing to stay put. This is keeping the supply of existing homes at a very low level,” says NAHB Chairman Alicia Huey.

She says that’s “fueling cautious optimism” while also pointing out that challenges remain, specifically shortages of transformers and other building materials, and tightening credit conditions for residential real estate development and construction.”

“In March, 33% of homes listed for sale were new homes in various stages of construction,” says NAHB Chief Economist Robert Dietz. “That share from 2000-2019 was a 12.7% average. With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead.”

The HMI survey also found that incentives have played a key role in attracting buyers in an economic climate of rising mortgage rates. However, the use of inducements appears to be slowing:

• The share of builders reducing home prices dropped to 27% in May from 30% in April, 31% in February and March, and 36% last November.
• The average price reduction remains 6%, unchanged for the past four months.
• 54% of builders offered some type of incentive to bolster sales in May, down from 59% in April and 62% last December.

All three major indices within the total HMI posted gains in May:

• The index gauging current sales conditions rose five points to 56.
• The component charting sales expectations in the next six months increased seven points to 57.
• The gauge measuring traffic of prospective buyers increased two points to 33.

Looking at the three-month moving averages for regional HMI scores, the, the Midwest edged up two points to 39, the South increased three points to 52 and the West moved three points higher to 41. The Northeast held steady at 45.

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.

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