Adapting to Change: Home Builder Confidence on the Rise

Despite a complex landscape of rising mortgage rates, increased construction costs, and limited lot availability, there’s a silver lining in the housing industry – an unexpected boost in builder confidence. The scarce inventory of existing homes is keeping the demand for new constructions alive and well.

An Uplift in Builder Confidence

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence for newly built single-family homes gained a point to reach a score of 56 in July. This represents the seventh consecutive monthly increase and the highest level since June of the previous year.

The Driving Forces

The primary force behind this uptick is the shortage of resale inventory. Alicia Huey, NAHB Chairman, notes that this deficiency is compelling homebuyers to shift their focus towards the new construction market. However, builders are keeping an eye on looming challenges, such as the anticipation of mortgage rates nearing 7% and the ongoing scarcity of necessary construction equipment.

Maintaining Optimism

Yet, amidst these hurdles, the industry is maintaining a cautiously optimistic outlook. NAHB Chief Economist Robert Dietz asserts that while the recent quarter-point rise in mortgage rates serves as a reminder of potential market volatility, it’s not all doom and gloom.

Interestingly, shelter inflation, which accounts for approximately 40% of the Consumer Price Index, could be mitigated by constructing additional for-rent and for-sale housing. This counters the narrative linking housing construction gains with increased inflation concerns. In fact, more housing supply could positively impact future shelter inflation readings, despite higher interest rates escalating the cost of financing home and lot developments.

The HMI Perspective

The NAHB/Wells Fargo HMI, derived from a monthly survey conducted for over 35 years, is an industry barometer gauging builder perceptions of current single-family home sales and sales expectations for the next six months.

In July, the HMI index tracking current sales conditions rose a point to 62. However, the component for sales expectations in the next six months dropped two points to 60. The gauge measuring traffic of prospective buyers increased three points to 40, the highest since June of last year.

Regional Outlook

Regionally, the three-month moving averages for HMI scores showed growth across the board. The Northeast rose by five points to 52, the Midwest by two to 45, the South by three to 58, and the West by five to 51.

A Note of Caution

Despite the overall positive sentiment, a note of caution is warranted. The decline in future sales expectation readings serves as a stark reminder that housing affordability continues to be challenged by elevated interest rates. Nonetheless, the positive trend in builder confidence suggests that the industry is displaying resilience and optimism, adapting effectively to the evolving market conditions.