Builders confidence edges up despite rising rate concerns

Low existing inventory that is keeping demand solid for new homes helped to push builder confidence up in July even as the industry continues to grapple with rising mortgage rates, elevated construction costs and limited lot availability.

Builder confidence in the market for newly built single-family homes in July posted a onepoint gain to 56, according to the NAHB/Wells Fargo Housing Market Index (HMI) released today. This is the seventh straight month that builder confidence has increased and marks the highest level since June of last year.

“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” said NAHB Chairman Alicia Huey. “At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”

“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said NAHB Chief Economist Robert Dietz.

Given that shelter inflation accounts for roughly 40% of the Consumer Price Index, Dietz added the best way to ease this largest source of inflationary pressure is to build additional for-rent and for-sale housing. “There’s been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards,” he said. “More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.”

The July HMI survey also revealed that despite elevated interest rates, builders’ use of sales incentives has declined, as the market has firmed vice president for forecasting and analysis. “In turn, this could bring home buyers back to the market as affordability conditions improve. And in another sign of cautious builder optimism, single-family permits registered their highest pace since June 2022.”

The number of single-family units under construction is down 17% compared to a year ago at 688,000. Meanwhile, the number of apartments under construction increased to 994,000, the highest total since May 1973.

On a regional and year-to-date basis, combined single-family and multifamily starts are 13.9% lower in the Northeast, 19.4% lower in the Midwest, 11.5% lower in the South and 21% lower in the West.

Overall permits decreased 3.7% to a 1.44 million unit annualized rate in June. Single-family permits increased 2.2% to a 922,000 unit rate but are down 21.5% year-todate. Multifamily permits decreased 12.8% to an annualized 518,000 pace, the lowest level since October 2020.

Looking at regional permit data on a yearto-date basis, permits are 23.4% lower in the Northeast, 20.8% lower in the Midwest, 16.2% lower in the South and 23.6% lower in the West n and resale inventory options remain limited. Only 22% of builders report cutting prices in July. This is down from 25% in June and 27% in May.

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 asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index gauging current sales conditions in July rose one point to 62, the component charting sales expectations in the next six months fell two points to 60, and the gauge measuring traffic of prospective buyers increased three points to 40, the highest reading since June of last year. However, the decline for the future sales expectation reading is a reminder that housing affordability continues to be challenged by elevated interest rates.

Looking at the three-month moving averages for regional HMI scores, the Northeast increased five points to 52, the Midwest edged up two points to 45, the South increased three points to 58 and the West posted a five-point gain to 51. n