A persistent shortage of resale homes is fueling builders’ optimism, as a key indicator of their confidence rose for the seventh month in a row in July.
According to Realtor.com, with mortgage rates at nearly 7%, many homeowners were finding little incentive to sell, and new listings were down 27% from a year ago.
This decrease in available resale homes has increased interest in new homes and given builders reason to remain confident about their outlook. The National Association of Home Builders’ (NAHB) monthly confidence index rose 1 point to 56 in July, the trade group said on Tuesday.
It was the seventh consecutive month that sentiment has improved among builders. Confidence among builders was also at the highest level since June 2022, with a reading of 56, compared to 55 a year ago.
Key Details
Builders continued to pull back on sales incentives amid strong interest from home buyers. The share of builders cutting prices to boost sales has dropped to 22% in July, from a peak of 36% in November 2022.
The three gauges that underpin the overall builder-confidence index were mixed.
Current Sales Conditions
Builders were optimistic about current sales conditions as the gauge rose by 1 point.
Future Sales
However, they were downbeat on future sales as the gauge fell by 2 points.
Prospective Buyers
Builders were also seeing steady traffic of prospective buyers, with the gauge rising by 3 points.
Big Picture: The Challenges of the Housing Market
In recent months, new homes have been a shining light in the housing market. Home builders have been able to meet the growing demand for homes despite the scarcity of listings for previously owned homes.
However, builders are becoming increasingly concerned about how long they can sustain this momentum. They foresee potential obstacles that could slow down the construction process. One major issue is the shortage of available lots to build homes on. Additionally, there is a lack of electrical-transformer equipment, which could further hamper construction. Considering the possible rise in interest rates to 7%, builders are worried about the potential impact on demand.
Concerns from the NAHB
The National Association of Home Builders (NAHB) expressed cautious optimism about the current market conditions. Nonetheless, they highlighted the recent quarter-point rise in mortgage rates as a reminder of the stop-and-start nature of the market. As the Federal Reserve nears the end of its tightening cycle, the market is likely to experience fluctuations.
Robert Dietz, the chief economist at the NAHB, emphasized the need for caution in light of these developments.
Market Reaction
As of Tuesday morning, the yield on the 10-year Treasury note stood at around 3.7%. This rate has potential implications for the housing market.
In response to these market conditions, the SPDR S&P Homebuilders ETF (XHB) saw higher levels of trade during the morning session. Notably, stocks of major home builders such as D.R. Horton Inc (DHI), Toll Brothers (TOL), and Lennar (LEN) experienced an increase in value.
