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03/15/2023

Builder confidence moves ahead in March

Home builders continue to employ incentives and price discounts while cashing in on new home sales.
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Home builder sentiment moved ahead two points in March, according to the latest NAHB/Wells Fargo Housing Index.

Home builder sentiment ticked upward for the third month in a row.

The cautious optimism arrives despite builders facing high construction costs and elevated interest rates that continue to impact housing affordability.

Builder confidence in the market for newly-built single-family homes in March rose two points to 44, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. 

“Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers are waiting for interest rates to drop and turning more to the new home market due to a shortage of existing inventory,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “But given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook.”

The latest HMI survey shows that builders had better than anticipated new home sales during the past two months as they continue to employ incentives and price discounts. 

About 31% of builders said they reduced home prices in March, the same share as in February, but lower than the 36% that was reported last November. And 58% provided some type of incentive in March, about the same as the 57% who did in February, but lower than the 62% of builders who offered incentives in December.

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NAHB Chairman Alcia Huey
NAHB Chairman Alicia Huey.

“While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers,” said NAHB Chief Economist Robert Dietz. “For example, 40% of builders in our March HMI survey currently cite lot availability as poor. And a follow-on effect of the pressure on regional banks, as well as continued Fed tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation. When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability.”

The HMI is derived from a monthly survey that gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index gauging current sales conditions in March rose 2 points to 49 and the gauge measuring traffic of prospective buyers increased three points to 31. This marks the strongest traffic reading since September of last year. The component charting sales expectations in the next six months fell one point to 47.

Looking at the three-month moving averages for regional HMI scores, the Northeast rose five points to 42, the Midwest edged one-point higher to 34, the South increased five points to 45 and the West moved four points higher to 34.

HMI tables can be found at nahb.org/hmi.