Builder confidence in the market for newly built single-family homes has reached its highest level since July 2023, signaling a robust recovery in the home construction industry. According to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today, confidence climbed three points to 51 in March. This marks the fourth consecutive monthly gain for the index and the first time builder sentiment has surpassed the critical midpoint of 50 since last July.
The increase in builder confidence is largely driven by a lack of existing home inventory, which continues to push buyers towards new construction. Coupled with strong demand and mortgage rates that have remained below last fall’s peak, the conditions are favorable for the home building sector. NAHB Chairman Carl Harris noted, “Buyer demand remains brisk and we expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year.”
However, the industry continues to face significant challenges. Builders are grappling with supply-side issues such as a scarcity of buildable lots, a shortage of skilled labor, and new restrictive building codes that increase construction costs. Despite these hurdles, the overall sentiment remains positive, buoyed by the anticipation of future rate cuts by the Federal Reserve in the second half of 2024, which could further lower financing costs and attract more buyers.
NAHB Chief Economist Robert Dietz highlighted the impact of potential future rate cuts, stating, “With the Federal Reserve expected to announce future rate cuts in the second half of 2024, lower financing costs will draw many prospective buyers into the market.” Dietz also pointed out that as home building activity intensifies, builders might face rising material costs, particularly for lumber, which could affect profit margins.
In response to the favorable mortgage rates, which have been below 7% since mid-December according to Freddie Mac, builders have scaled back on reducing home prices to boost sales. In March, only 24% of builders reported cutting home prices, a significant drop from 36% in December 2023 and the lowest share since July 2023. Nonetheless, the average price reduction remained steady at 6% for the ninth consecutive month. Additionally, the use of sales incentives by builders is holding firm, with 60% offering some form of incentive to attract buyers, a rate that has been consistent since last September.
The HMI, derived from a monthly survey conducted by NAHB for over 35 years, 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 assesses traffic of prospective buyers. Scores for each component are used to calculate a seasonally adjusted index where any number over 50 indicates more builders view conditions as good than poor.
In March, all three major HMI indices posted gains: the index for current sales conditions rose four points to 56, sales expectations for the next six months increased two points to 62, and the measure of traffic of prospective buyers went up two points to 34. Regionally, the three-month moving averages for HMI scores also showed improvement, with the Northeast up two points to 59, the Midwest rising five points to 41, the South increasing four points to 50, and the West gaining five points to 43.
This upward trend in builder confidence reflects a growing optimism in the housing market’s recovery, driven by sustained demand and favorable economic conditions, despite ongoing challenges in supply and construction costs.
