It’s looking a bit more like a homebuilder’s market.
Builder confidence pushed into positive territory in June for the first time in 11 months, according to the National Association of Home Builders (NAHB)/Wells Fargo housing market index update released Monday. The index reading rose to 55 from 50 in May, marking the sixth month in a row that sentiment increased and the first time it crossed the midpoint of 50 since July 2022.
The newfound enthusiasm reflects that robust foot traffic from homebuyers, little competition from the resale side, and an improved supply chain have together helped tip the housing market in builders’ favor. Headwinds still exist, though, as project financing has become harder to come by.
“Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.
Stable traffic returns
As mortgage rates rose rapidly last year because of the Federal Reserve’s aggressive efforts to combat inflation, homebuyers fled to the sidelines. They returned, though, at the beginning of the year, resigned to stomaching the higher borrowing costs.
The NAHB gauge measuring traffic of prospective buyers increased 4 points in June.
“Overall, buyers appear to be adjusting to mortgage rates that have stabilized in the 6% to 7% range,” Toll Brothers Chairman and CEO Douglas C. Yearley said in late May, during the builder’s second-quarter earnings call. “The shock of last year’s abrupt spike in rates appears to be wearing off, and buyers are moving on with their lives.”
While the average rate on the 30-year fixed mortgage — the most popular home loan for purchases — sat at 6.69% last week, many builders can offer a rate much lower than that through their financing arms to attract price-conscious buyers.
“So buyers out there today that are buying new homes are not paying 6.5% — the headline rate,” John Lovallo, UBS homebuilders and building products analyst, told Yahoo Finance Live last month. “They’re paying under 5% in most cases.”
Limited resale inventory
Elevated mortgage rates are also helping builders on the supply side, too, by limiting the number of homeowners who are willing to sell in these market conditions.
“Now with 90% of outstanding mortgages under 5%, the market is seeing the further impact of a low interest rate lock-in effect, existing homeowners are reluctant to give up their low rate mortgages, which has led to historically tight resale inventories,” Yearley said last month.
He cited recent reports that found that about 35% of homes for sale are new builders, compared with the historic average of 10% to 15%.
“On the existing home side … there’s just not much out there,” Lovallo said. “So I think buyers that are looking for a home at this point are probably more inclined today than at any point in history to have to focus on a new home.”
That dynamic helped to buoy sales forecasts. Most major builders increased their outlooks for the rest of the year, and the NAHB measures for current sales conditions and sales expectations six months from now both increased in June.
Supply chain improves
Another boost to builders is an improving supply chain wrought by the pandemic. Lumber costs are down. Hiring also has gotten a bit easier.
“Let me say that from Lennar’s perspective, it really feels like the supply chain disruptions are behind us with a few minor exceptions,” Lennar Corp. Co-CEO Jonathan Jaffe said last week during the builder’s earnings call.
But project financing remains a headwind, especially after the failure of several regional banks this year roiled markets.
“Access for builder and developer loans has become more difficult to obtain over the last year, which will ultimately result in lower lot supplies as the industry tries to expand off cycle lows,” NAHB’s Huey said alongside the new data.
