Homebuilders See Bright Spots as Inventory Decreases

Home builders are becoming more optimistic about the future in large part because limited inventory means demand will increase for their new home products coming to market. That was evidenced in April by builder confidence climbing one point to 45, according to the National Association of Home Builders (NAHB/Wells Fargo Housing Market Index (HMI), a report released this week. 

Also, the number of builders needing to reduce home prices keeps declining, another reason to be cautiously optimistic, according to the HMI report.

NAHB Chairman Alicia Huey, also a Birmingham, Ala.. custom homebuilder and developer, offers more insight on the uptick. “For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates,” she says, adding that more good news might be coming as declines in mortgage rates move down below 6%. This is especially important since one-third of housing inventory now comes from new construction, a big increase from the past when it was only a bit above 10%, explains her colleague, NAHB Chief Economist Robert Dietz. On the cautionary side, part of the increases may be due to homebuilders offering more sales incentives.

But there’s still other good news to note: a decrease in homebuilders needing to pare prices. Those figures were down in April to 30% versus 31% in March and February, 35% in December and 36% in November. The average price reduction also decreased to 6% in April, the same as in the prior two months and lower than the 8% in December.

Why the report is also important is that it gauges homebuilder perceptions regarding current single-family home sales and sales expectations for the coming six months and asks them to rate traffic of prospective buyers. Any number greater than 50 indicates that more builders see the climate as good versus poor. The current sales conditions rose to 51 in April and the number detailing expectations increased to 50, both good markers and the first time these components returned to that range since June 2022. At the same time regional scores varied for the three-month averages with the South the highest, followed by the Northeast, West and then the Midwest.