Builder Confidence Falls but Single-Family Starts Edge Higher

August 17th, 2023 by Editor

The National Association of Homebuilders (NAHB) has reported that, after steadily rising for seven consecutive months, builder confidence fell for the first time this year in August. The association points to rising mortgage rates that, according to Freddie Mac, are nearing 7%, along with “stubbornly high” shelter inflation, as having eroded housing affordability and put a damper on consumer demand.

Builder confidence in the market for newly built single-family homes in August fell six points to 50, according to the NAHB/Wells Fargo Housing Market Index (HMI) released this week.

“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said NAHB chairperson Alicia Huey, a custom home builder and developer from Birmingham, Ala. “But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many homeowners elect to stay put because they are locked in at a low mortgage rate.”

The August HMI survey also revealed that rising mortgage rates are causing more builders to use sales incentives to attract home buyers. After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August. The average decline for builders reducing prices remained at 6%. And the share of builders using incentives to bolster sales was 55% in August, higher than in July (52%) but still lower than in December 2022 (62%).

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months. 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.

“Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%,” said NAHB chief economist Robert Dietz. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.”

All three major HMI indices posted declines in August. The HMI index gauging current sales conditions fell five points to 57, the component charting sales expectations in the next six months declined four points to 55 and the gauge measuring traffic of prospective buyers dropped six points to 34.

At the same time, overall housing starts increased 3.9% in July to a seasonally adjusted annual rate of 1.45 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The July reading of 1.45 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 6.7% to a 983,000 seasonally adjusted annual rate. Single-family starts are also 9.5% higher than a year ago. The multifamily sector, which includes apartment buildings and condos, decreased 1.7% to an annualized 469,000 pace.

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