Builder Sentiment Rises for the Fourth Straight Month as Existing Home Supply Remains Scarce

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The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) climbed to 45 in April, a one-point gain, marking the fourth straight month of builder sentiment growth. While the reading is still below 50, indicating a negative outlook, the rise is a positive sign for the housing market. The supply of existing homes for sale continues to be limited, which is driving demand for new construction.

Builders reported that the lack of existing home listings has given them an unusual edge, with new listings of existing homes falling about 25% compared to a year ago. The scarcity of existing homes has put new construction in the spotlight, and buyers are turning to builders to meet their housing needs.

Slightly lower mortgage rates are also contributing to the demand for newly built homes. However, rates are still higher than they were a year ago. Alicia Huey, NAHB chairman and a custom homebuilder and developer from Birmingham, Alabama, notes that additional declines in mortgage rates, to below 6%, will further increase demand for housing. Nonetheless, the industry continues to face challenges in the form of building material issues, including a lack of access to electrical transformer equipment.

The HMI has three components, and all three have improved. Current sales conditions rose two points to 51, while sales expectations in the next six months increased three points to 50, marking the first time both indicators were positive since June 2022, when mortgage rates surged. However, buyer traffic was unchanged at 31, the first time it hasn't improved this year.

Builders report that one-third of the housing inventory is new construction, compared to historical norms of around 10%. Despite concerns that builders might face difficulty with construction loans after recent regional bank failures, the high volume of new construction suggests that this is not the case.

Sales incentives by builders, including mortgage rate buy-downs, have been successful in boosting demand in recent months. However, the share of builders reducing home prices is dropping. Just under a third of builders reported cutting prices in April, down from 35% at the end of last year. The average price reduction in April was 6%.

The share of builders using incentives rose slightly to 59% in April from 58% in March, but it was still lower than December's read of 62%.

Regionally, on a three-month moving average, builder sentiment in the Northeast rose four points to 46, while in the Midwest, it rose two points to 37. In the South, it increased four points to 49, and in the West, it rose four points to 38.

While the housing market faces challenges in the form of building material issues and high mortgage rates, the rise in builder sentiment is a positive sign for the industry. The lack of existing home supply continues to drive demand for new construction, and builders are stepping up to meet the needs of homebuyers. As the industry continues to evolve, it's important for builders to stay adaptable and continue to innovate to meet the changing needs of the market.

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