Confidence among US single-family homebuilders hit the highest level in 10 months, improving in May for the fifth consecutive month, as limited home stock helped to renew optimism for the sector.
The National Association of Home Builders/Wells Fargo's gauge of builder sentiment increased five points to 50, data released Monday showed, marking the first time the reading reached the midpoint mark of 50 since July 2022. A reading over 50 indicates that more builders view conditions to be good.
The measure also topped expectations. Economists surveyed by Bloomberg had called for a reading of 45.
“New home construction is taking on an increased role in the marketplace because many homeowners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.
“While this is fueling cautious optimism among builders, they continue to face ongoing challenges to meet a growing demand for new construction. 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,” Huey added.
Other metrics illustrated that builders are gaining an edge.
In May, just 27% of builders reduced home prices, down from 30% in April, 31% in February and March, and 36% in November, the NAHB found.
The average price reduction remained at 6%, unchanged from the past four months, while 54% of home builders offered some type of incentive to bolster sales in May, down from 59% in April and 62% in December.
Last month, D.R. Horton CEO David Auld said on the company's latest earnings call that the spring selling season was “off to an encouraging start” and that the builder recorded a 73% increase in net sales from the previous quarter. Both D.R. Horton (DHI) and PulteGroup (PHM) reported better-than-expected results in the first three months of the year.
Underpinning the optimism is the inventory conditions that are favoring builders.
“Lack of existing inventory continues to drive buyers to new construction,” NAHB Chief Economist Robert Dietz wrote in a statement.
“In March, 33% of homes listed for sale were new homes in various stages of construction. That share from 2000-2019 was a 12.7% average. With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead,” he added.
Sales conditions posted gains in May, increasing to 56, and sales expectations for the next six months rose to 57. The gauge of upcoming buyer traffic increased two points to 33.
Builder sentiment in May increased across three regions in the Midwest, South and West, while in the Northeast, it held steady.
Still, headwinds remain for builders.
Lingering supply chain issues are still affecting construction. And separately, some home builders are hesitant about the tighter credit conditions impacting future housing projects, a report from Zonda found.
Last week, a Federal Reserve survey reported that lenders are making it tougher for consumers and businesses to get a loan after the bank collapses in March. That release also followed the Federal Reserve's 10th consecutive interest-rate hike earlier this month that has raised borrowing costs for construction.
Homebuyers also remain rate-sensitive, especially as home prices begin to rise again, worsening affordability.
But the recent, modest dip in mortgage rates has buoyed sentiment, with housing confidence among Americans at the highest level in a year.
The average 30-year mortgage rate stood at 6.35% last week, down from 6.39% the week prior and marking the second straight weekly decline, according to Freddie Mac.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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