Builders confidence is measured at 44%, according to the National Association of Home Builders (NAHB) Housing Market Index, released this week.
The HMI has steadily increased since a low of 31 in December 2022. Yet the homebuilding future is uncertain due to “volatility in interest rates.”
Why the HMI Is Shifting
Although high construction costs and elevated interest rates continue to hamper housing affordability,a lack of existing inventory is shifting demand to the new home market, according to the NAHB.
Construction costs now account for 60.8% of a home’s price, according to a separate NAHB survey (see below).
“Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers are waiting for interest rates to drop and turning more to the new home market due to a shortage of existing inventory,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “But given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook.”
NAHB Chief Economisst Robert Dietz said that builders are also challenged by the availability of building lots, as well as constraints on acquisition, development and construction on those lots. He said that the cost and availability of housing inventory continue to be “critical constraints” for prospective home buyers.
“For example, 40% of builders in our March HMI survey currently cite lot availability as poor,” Dietz said. “And a follow-on effect of the pressure on regional banks, as well as continued Fed tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation.”
When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability, Dietz explained.
How the Index Is Calculated
The NAHB/Wells Fargo HMI is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers. Each month, a panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low”. An index is calculated for each series by applying the formula “(good – poor + 100)/2” or, for Traffic, “(high/very high – low/very low + 100)/2”.
HMI Breakdown for March 2023
In the NAHB March report, the three components were measured:
- Sales of Single Family Homes Now – 49%
- Sales of Single Family Home for Next Six Months – 47
- Traffic of Prospective Buyers – 31%
The overall 44% HMI is the average of those three components.
Regional HMI Breakdown
The South and the Northeast continue to lead the way in reported builder confidence. Here are the numbers:
- South 50%
- Northeast 46%
- West 36%
- Midwest 35%
Construction Cost Calculations
The NAHB recently conducted a survey to calculate the degree that construction cost contributes to the home’s sale price.
According to the survey, based on figures from 2022, 60.8% of a home’s sales price is the construction cost.
The percentage is only the fourth time since 1998 that construction costs have topped the 60% amount.
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Builder confidence across the country has seen a gradual increase in the last few months, signaling an optimistic outlook in the U.S. housing market. According to the latest data from the National Association of Home Builders/ Wells Fargo Housing Market Index, builder confidence is continuing its cautious rise, with a slight uptick in April.
The index, which measures builder perception of market conditions, rose to 62 in April, up from a previous reading of 61 in March. The one-point gain marks a five-month increase in the index, which began last December. It is also the highest reading since October 2018.
Analysts point to a number of positive indicators that have contributed to the gradual housing market recovery. Generally low mortgage rates, reassuring employment numbers, and increased consumer confidence have all been viewed as contributors to the recovery. According to the report, builder confidence is especially strong in the Northeast, Midwest and South, where confidence stands at 66, 64, and 62 (respectively).
“Solid economic fundamentals, favorable demographic trends and a growing willingness among consumers to purchase newly-built homes are helping to keep the market moving forward,” said NAHB chairman Greg Ugalde. “Builders are optimistic that this steady recovery will continue to gather momentum in the months ahead.”
The housing market’s steady growth, however, is not without its challenges. Increasing regulations, tariffs, and material costs are seen as the primary obstacles. “With conditions in the job market remaining favorable, the industry should continue to steadily make progress in 2020,” said NAHB Chief Economist Robert Dietz.
While the Housing Market Index reports a positive trend in builder sentiment, it is important to note that the recovery is still in its early stages. As markets continue to adjust, it is likely that we will see further fluctuations in the months ahead.