Builder confidence has entered positive territory for the first time in 11 months, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The index rose by five points in June, reaching a reading of 55. This marks the sixth consecutive month of increasing builder confidence and the first time since July 2022 that sentiment levels have surpassed the midpoint of 50.
Several factors have contributed to this positive shift. The solid demand for newly built single-family homes, coupled with a lack of existing inventory, has played a crucial role. Additionally, improvements in the supply chain efficiency have helped bolster confidence among builders.
The recovery in builder sentiment suggests that a bottom is forming for single-family home building. As sentiment gradually rises, both the current and future sales components of the HMI have exceeded 60 for the first time in a year. This indicates that buyers are adapting to the new normal in terms of interest rates. Moreover, the nearing end of the Federal Reserve's tightening cycle is expected to have positive implications for future market conditions, particularly concerning mortgage rates and financing costs for builders and developers.
Image: National Association of Home Builders
However, despite the positive trend, access to loans for builders and developers has become more challenging over the past year. This could ultimately lead to lower lot supplies as the industry tries to recover from cycle lows.
The housing market's performance is crucial for the inflation outlook and future monetary policy. Shelter cost growth has emerged as the leading source of inflation, and addressing this issue necessitates the construction of more affordable and attainable housing options, including both for-sale and for-rent properties in the multifamily and single-family sectors. Policymakers can play a crucial role in combating inflation by addressing supply chain issues, addressing the skilled labor shortage, and streamlining inefficient regulatory policies such as exclusionary zoning.
In a positive sign for the state of demand for single-family homes, builders are gradually reducing sales incentives. The June HMI survey indicates a decline in home price reductions, with 25% of builders reducing prices compared to 27% in May and 30% in April. The average price reduction in June stood at 7%, down from 8% in December 2022. Additionally, 56% of builders offered incentives to buyers in June, slightly higher than in May but lower than the figure of 62% in December 2022.
The NAHB/Wells Fargo HMI, derived from a monthly survey conducted for over 35 years, provides insights into builder perceptions of current single-family home sales and sales expectations for the next six months. The June survey reveals positive gains across all three major HMI indices. The index measuring current sales conditions increased by five points to 61, the component tracking sales expectations in the next six months rose by six points to 62, and the gauge measuring traffic of prospective buyers increased by four points to 37.
Analyzing the three-month moving averages for regional HMI scores, the Northeast saw a two-point increase to 47, the Midwest experienced a four-point increase to 43, the South rose three points to 55, and the West posted a notable five-point gain, reaching 46.
