Ultra-low inventory and the lack of existing home sales have dominated real estate headlines throughout the year. While many buyers remain on the sidelines due to high-interest rates, homebuilders are still finding ways to reap the benefits.
The builder confidence rating, which is the primary measure of market sentiment among major residential construction firms, jumped 5 points in May. This was not only the fifth consecutive month of gains, but it was also the first month the index landed in positive territory (50+ points) since July 2022.
According to the report, which was released by the National Association of Home Builders (NAHB) and the Wells Fargo Housing Index (HMI), home builder confidence was at 50 in May, which is still down 19 points year over year. Of the three specific indices, current sales conditions were up 5 points (56), sales expectations in the next six months score were up 7 points (57), and buyer traffic was up 2 points (33).
Out of regional HMI scores, the South increased three points to 52, the West moved three points to 41, the Midwest only rose 2 points to 39, and the Northeast showed no gain at 45.
According to NAHB Chairman Alicia Huey, these incremental gains are likely due to the several challenges that continue to persist in the market. High rates mean fewer sellers are listing, which limits options for the remaining buyers in the market. As a result, these buyers are turning to new construction instead of existing homes.
“New home construction is taking on an increased role in the marketplace because many homeowners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level,” Huey said in a release.
To put things into perspective, new home listings were down 22% in April and mortgage rates are 2X higher than 18 months ago. Around 14 million people refinanced their mortgages during the pandemic, and most potential sellers are reluctant to exchange their low rates for higher ones. As a result, inventory has remained low for much of the year, which is driving an uptick in demand for new construction.
According to NAHB’s chief economist Robert Dietz, 33% of homes listed for sale in March were new homes in various stages of construction. Only 12.7% of new home listings were under construction from 2000 – 2019.
To further capitalize on the opportunity, home builders have been dropping prices and paying-down mortgage rates to increase demand. However, the percentage of home builders offering incentives has been falling with only 54% providing some type of offer in May, which is down from 62% last November. Only 27% of builders reduced prices in May, which is down from 36% last November as higher demand offsets the need for these ongoing incentives.
However, home builders are still facing many pandemic-induced macroeconomic headwinds, which could limit supply over the coming months.
“These include shortages of transformers and other building materials and tightening credit conditions for residential real estate development and construction brought on by the actions of the Federal Reserve to raise interest rates,” Alicia Huey said.
It seems likely demand for new construction will continue to rise in the near term as rates remain elevated, but there is a decent chance demand will continue to grow for quite some time. There is a lot of pent-up demand from buyers who have been sidelined by high-interest rates. To keep up with demand in high-growth markets throughout Florida and Texas, homebuilders will likely continue growing partnerships with infrastructure development firms in order to maintain a healthy supply of ready-to-build lots and speed up new development.