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Homebuilders are still smiling (and cutting down on sales incentives)

Builder sentiment reaches highest level in over a year

For the seventh consecutive month, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report rose month-over-month, gaining one-point to a reading of 56, according to a report released Tuesday.

This is the index’s highest reading since June 2022.

The NAHB/HMI report is based on a monthly survey of NAHB members, in which homebuilders are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the homebuilder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.

The NAHB attributes the continued rise in builder confidence to low existing home inventory.

“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,” Alicia Huey, the chairman of the NAHB, said in a statement. “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.”

With shelter inflation accounting for 40% of the Consumer Price Index, the NAHB says the best way to combat this 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,” Robert Dietz, the NAHB chief economist, said in a statement. “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.”

Despite the rising interest rates and continued shelter inflation, builders have cut back their use of sales incentives, with just 22% of builders reporting that they cut prices in July, down from 25% in June and 27% in May.

The NAHB reported that homebuilders’ gauge of current sales conditions rose one point to 62. The gauge measuring traffic of prospective buyers increased three points to 40, the highest reading since June of 2022, but the component charting sales expectations over the next six months, fell two points to 60. According to the NAHB, this serves as a reminder that housing affordability continues to be challenged by elevated interest rates.

“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,” Dietz said.

Regionally, the three-month moving averages for HMI rose in all four regions, with the West gaining five points to a reading of 51, the South increasing three points to 58, the Midwest rising two points to a reading of 45, and the Northeast rose five points to 52.

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