The numbers: Homebuilders are feeling optimistic amid strong demand from buyers who are struggling with a low number of houses for sale.
Many sellers are holding off on listing their homes as they lack an incentive to give up their historically ultra-low mortgage rate secured during the pandemic.
The U.S. National Association of Home Builders’ (NAHB) monthly confidence index rose 5 points to 50 in May, the trade group said on Tuesday.
This is the fifth month in a row that sentiment has improved among builders. The slight rise in confidence exceeded expectations on Wall Street.
The May reading of 50 was the strongest since July 2022. A year ago, the index stood at 69.
Builders were optimistic about the future as buyers continue to deal with a shortage of homes for sale on the market, which is in part a consequence of millions of homeowners refinancing their mortgage to ultra-low rates during the pandemic.
Key details: The three gauges that underpin the overall builder-confidence index were up.
The gauge that marks current sales conditions rose by 5 points.
- The component that assesses sales expectations for the next six months rose by 7 points.
- And the gauge that measures traffic of prospective buyers rose by 2 points.
Builders in most of the U.S. regions reported an increase in confidence, the NAHB said.
As demand holds steady, builders are dropping incentives for home buyers. The share of builders cutting prices fell to 27% in May from 30% in April.
The average size of the price reduction is around 6%, the NAHB said.
Big picture: A lack of supply of previously owned homes is pushing buyers towards new homes and builders are consequently gaining market share.
In March, about a third of homes listed for sale were new homes, the NAHB said, when historically between 2000 and 2019 that share was an average of 12.7%.
Roughly 14 million mortgage borrowers refinanced during the pandemic to ultra-low rates, according to the New York Fed.
What the NAHB said: “With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead,” Robert Dietz, chief economist at the NAHB, said in a statement.
But builders warn that they have constraints of their own that they’re still dealing with which could limit new supply down the line.
“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, chairman of the NAHB and a custom home builder and developer from Birmingham, Ala., said in a statement.
What are they saying? “While this is good news for the economy, it is once again bad news for the Federal Reserve and its efforts to bring inflation down over the long term,” Giampiero Fuentes, an economist with Raymond James, wrote in a note.
Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose above 3.5% on Tuesday morning.
The SPDR S&P Homebuilders ETF
XHB,
traded slightly lower during the morning session, as well as big home builder stocks like D.R. Horton Inc.
DHI,
Toll Brothers
TOL,
and Lennar
LEN,
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