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The housing market is increasingly favoring homebuilders, as builder confidence reached positive territory in June for the first time in nearly a year, according to the National Association of Home Builders (NAHB)/Wells Fargo housing market index update released on Monday. The index reading rose to 55 from 50 in May, marking the sixth consecutive month of increased sentiment and the first time it has surpassed the midpoint of 50 since July 2022.
This newfound enthusiasm among builders can be attributed to robust foot traffic from homebuyers, limited competition from the resale side, and improvements in the supply chain. However, there are still challenges, particularly in project financing, which has become increasingly difficult to obtain.
NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated, “Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains.”
Stable traffic patterns have returned to the market after a period of decline when mortgage rates rose rapidly last year due to the Federal Reserve’s efforts to combat inflation. Homebuyers have adjusted to the higher borrowing costs and are now returning to the market. The NAHB gauge measuring the traffic of prospective buyers increased by 4 points in June.
Toll Brothers Chairman and CEO Douglas C. Yearley noted that buyers have acclimated to mortgage rates stabilized in the 6% to 7% range, stating, “The shock of last year’s abrupt spike in rates appears to be wearing off, and buyers are moving on with their lives.” Although the average rate on the 30-year fixed mortgage stood at 6.69% last week, many builders can offer rates much lower than that through their financing arms to attract price-conscious buyers.
According to John Lovallo, UBS homebuilders and building products analyst, buyers purchasing new homes today are typically paying under 5%, dispelling the notion that they are subject to the headline rate of 6.5% mentioned in the media.
In June, 56% of builders offered incentives to buyers, slightly up from 54% in May, while only a quarter of builders reduced their prices, down from 27% in May and 30% in April.
Builders are also benefiting from limited resale inventory, as elevated mortgage rates discourage homeowners from selling in the current market conditions. With 90% of outstanding mortgages being under 5%, existing homeowners are reluctant to give up their low-rate mortgages, resulting in historically tight resale inventories. Recent reports indicate that about 35% of homes for sale are new builds, significantly higher than the historical average of 10% to 15%.
The limited supply of existing homes has led buyers to focus on new homes, supporting sales forecasts. Most major builders have increased their outlooks for the remainder of the year, and the NAHB measures for current sales conditions and sales expectations six months from now have both seen an increase in June.
Another positive factor for builders is the improving supply chain. Lumber costs have decreased, and the hiring process has become somewhat easier. Lennar Corp. Co-CEO Jonathan Jaffe expressed confidence in the supply chain, stating, “It really feels like the supply chain disruptions are behind us with a few minor exceptions.”
However, project financing remains a challenge, particularly after the failure of several regional banks this year, which has disrupted the markets. Access to builder and developer loans has become more difficult in the past year, potentially resulting in lower lot supplies as the industry aims to expand from cycle lows, according to NAHB’s Huey.
Overall, the housing market is increasingly favorable for homebuilders due to factors such as improved builder confidence, stable traffic, limited resale inventory, and an improving supply chain. While challenges remain, builders are cautiously optimistic about market conditions and are adjusting to the evolving dynamics of the industry.