Homebuilder sentiment pulls out of negative territory for the first time in nearly a year

Homebuilders are getting a big boost from the lack of existing homes for sale, and that appears to be outweighing some of the challenges they’re facing from financial markets.

Builder confidence in the market for newly built single-family homes rose 5 points in May to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). It’s the fifth straight month of gains and the first reading of builder sentiment since July that wasn’t negative, which would be a reading below 50. Sentiment stood at 69 in May of last year.

“New home construction is taking on an increased role in the marketplace because many home owners 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,” said NAHB Chairman Alicia Huey, a homebuilder from Birmingham, Alabama, in a release.

Huey noted that builders continue to face challenges to meet the growing demand. While the price of lumber has been falling since March, there are still supply shortages of building materials as well as tightening credit conditions for residential real estate development and construction due to the recent banking crisis and higher interest rates.

Of the index’s three components, current sales conditions rose 5 points to 56, sales expectations in the next six months increased 7 points to 57, and buyer traffic increased 2 points to 33.

Builders are benefitting from a very lean existing home market. New listings in April were down nearly 22% year over year, according to Realtor.com. With mortgage rates now double what they were a year and a half ago, some potential sellers may be reluctant to trade to another home at a higher rate.

“In March, 33% of homes listed for sale were new homes in various stages of construction. That share from 2000-2019 was a 12.7% average. With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead,” said Robert Dietz, NAHB’s chief economist.

Homebuilders also drew more buyers by offering incentives, like buying down mortgage rates. Those, however, appear to be winding down and demand grows.

The share of builders reducing home prices dropped to 27% in May, down from 30% in April, 31% in February and March, and 36% last November. While just over half of builders are still offering some type of sales incentive, the share is down from 62% last December.

Regionally, on a three-month moving average, builder sentiment in the Northeast was unchanged at 45. Sentiment in the Midwest rose 2 points to 39. In the South, it increased 3 points to 52, and in the West moved 3 points higher to 41.