Builder confidence is up as more buyers opt for new homes
While rising interest rates have slowed the rate of increase, confidence is at its highest level in more than a year.
Key points:
- July marks the seventh straight month of increasing builder confidence after a year of declines in 2022.
- More buyers are turning to new construction as inventory of existing homes remains constrained.
- Single-family permits are down year-over-year but are expected to pick up again in the coming months.
Despite rising interest rates and a slowdown in the overall housing market, builder confidence continues to rise this summer.
Builder confidence for newly built single-family homes rose one point to 56 in July, according to the National Association of Home Builders/Wells Fargo Housing Market Index. After falling throughout 2022, the index has now risen for seven straight months and is at the highest level since June 2022.
What is driving builder optimism in an environment where many homebuyers and sellers seem stuck? More buyers — at least those who are not priced out of the market — are turning to new construction homes, said Robert Dietz, chief economist at the NAHB.
New home sales in May were up 20% compared to a year earlier, according to the U.S. Census Bureau. At the same time, NAR reported a 20.4% decline in existing home sales.
Dietz said the uptick in builder confidence has slowed recently because of rising interest rates and affordability difficulties, but he believes that's only a short-term challenge.
"I expect … builder confidence to post gains again as the Fed ends its tightening cycle," Dietz said in an email.
The rise in confidence comes at a time when the number of single-family housing permit applications has slowed. The number of permits issued in the first five months of 2023 was 24.7% lower compared to the same period last year, according to data from NAHB economist Danushka Nanayakkara-Skillington. Broken down at the state level, only Hawaii experienced year-over-year growth in permits.
Dietz noted that single-family permits are down on a year-to-date basis due to the slowing of the market at the end of 2022.
"We expect a grudging improvement in the monthly annualized rates of single-family permits and starts during the second half of 2023 with outright gains for starts in 2024," Dietz said.
Perhaps because of the increased buyer interest in new construction, the survey also found the use of sales incentives has declined. Only 22% of builders reported cutting prices in July, down from 25% in June and 27% in May.
Broken down by regions over the past three months, the Northeast and West have posted the biggest gains in builder confidence, with each rising five points to 52 and 51 respectively. The Southeast has the highest overall confidence score at 58, rising three points in the past three months. The Midwest rose two points to 45.