Home Builder Confidence Shifts Into Positive Territory

According to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly built single-family homes in June 2023 rose five points to 55—marking the sixth consecutive month that builder confidence has increased, and the first time that sentiment levels have surpassed the midpoint of 50 since July of 2022.

“Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains,” said NAHB Chairman Alicia Huey. “However, access for builder and developer loans has become more difficult to obtain over the last year, which will ultimately result in lower lot supplies as the industry tries to expand off cycle lows.”

The spring 2023 homebuying season has been anything but typical as mortgage rates continue in the upper 6%-range, with the 30-year fixed-rate mortgage (FRM) falling for the second consecutive week last week, as Freddie Mac reports in its latest Primary Mortgage Market Survey (PMMS) that the FRM averaged 6.69% as of June 15, 2023, down from previous week when it averaged 6.71%. A year ago at this time, the 30-year FRM averaged 5.78%.

Sam Khater, Freddie Mac’s Chief Economist, noted, “As inflation continues to decelerate, economic growth is slowing and the tightening cycle of monetary policy is reaching its apex, which means mortgage rates are expected to decrease later this year and into next.”

In a sign of gradual optimism for the state of demand for single-family homes, NAHB’s June HMI survey shows that overall, builders are gradually pulling back on sales incentives, as 25% of builders reduced home prices to bolster sales in June. The same share was 27% in May and 30% in April, and has declined steadily since peaking at 36% in November 2022. The average price reduction was 7% in June, below the 8% rate in December 2022. Fifty-six percent of builders offered incentives to buyers in June, slightly more than in May (54%), but fewer than in December 2022 (62%).

NAHB Chief Economist Robert Dietz added, “A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year. This month marks the first time in a year that both the current and future sales components of the HMI have exceeded 60, as some buyers adjust to a new normal in terms of interest rates. The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans.”

And as mortgage rates trended downward, overall mortgage application volume began to rise again with the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey reporting for the week ending June 9, that overall mortgage application volume rose 7.2% week-over-week. Yet with rates in excess of 6.5% has impacted refi volume year-over-year as the MBA reported refi activity 41% lower than the same week just one year ago.

“Shelter cost growth is now the leading source of inflation, and such costs can only be tamed by building more affordable, attainable housing – for-sale, for-rent, multifamily and single-family,” Dietz said. “By addressing supply chain issues, the skilled labor shortage, and reducing or eliminating inefficient regulatory policies such as exclusionary zoning, policymakers can play an important and much-needed role in the fight against inflation.”

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI 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 asks builders to rate traffic of prospective buyers as “High to Very High,” “Average” or “Low to Very Low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

All three major HMI indices posted gains in June, as the NAHB’s HMI Index which gauges current sales conditions rose five points to 61, the component charting sales expectations in the next six months increased six points to 62, and the gauge measuring traffic of prospective buyers increased four points to 37.

Regionally, the three-month moving averages for regional HMI scores found the Northeast edging up two points to 47, the Midwest increasing four points to 43, the South moving three points higher to 55, and the West posting a five-point gain to hitting the 46-mark.

Playing a key role in measuring builder confidence is the direction taken by the Federal Reserve with the nominal interest rates. At the conclusion of June’s Federal Open Market Committee (FOMC), the Fed paused raising the nominal interest and letting it stand at a range of 5.00% to 5.25% due to continued easing. The Fed’s decision concludes the most aggressive series of consecutive hikes in history, a streak of 10 rate hikes over the past 15 months, beginning with March 2022’s hike of +25 points, and followed by May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), March 2023 (+25 points), and May 2023 (+25 points)—equivalent to a rise of 5.00 percentage points over the last year.