The outlook among homebuilders improved in May, as production for single-family projects saw its highest rate yet in 2023. Confidence in the market for newly built single-family homes rose by five points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The improvement marks a fifth straight month of increase and the first time that sentiment levels reached a mid-mark of 50 since July 2022. Derived from a monthly survey, HMI 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.

All three major HMI indices posted gains in May, with the index gauging current sales conditions rising five points to 56. The component charting sales expectations for the next six months increased seven points to 57, and the gauge measuring traffic of prospective buyers increased two points to 33.

The uptick in confidence arrives amid an increase in housing starts, driven in part by an ongoing shortage of available homes on the resale side of the market. There are also fewer new homes on the market, as the number of single-family homes under construction fell to 698,000 in April, down 16% from a peak total of 831,000 in May 2022. With mortgage rates stabilizing and the Federal Reserve signaling an end to economic tightening, builders have opted to begin more projects, NAHB officials said. They do so while continuing to face higher construction costs, labor shortages and tightening conditions for construction loans.

“Lack of existing inventory continues to drive buyers to new construction,” said NAHB chief economist Robert Dietz. “In March, 33% of homes listed for sale were new homes in various stages of construction. That share from 2000-19 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.”

As a result, housing starts increased in April by 2.2%, to a seasonally adjusted annual rate of 1.4 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The reading reflects the number of housing units builders would begin if development kept this pace for the next 12 months. Single-family starts increased 1.6% to an 846,000 seasonally adjusted annual rate. That’s 28% lower than the same time last year, but another step in the right direction, NAHB officials said.

“Single-family starts are showing gradual improvement from the beginning of the year, and this is reflected in our builder sentiment surveys, which are up for five consecutive months,” said NAHB chairperson Alicia Huey. “Due to a lack of inventory for resales, we expect to see further improvement for single-family production in the months ahead, even as builders continue to grapple with supply-chain and labor shortages.”

With interest rates more than doubling from 2021 levels, builders have so far found ways to stimulate the market for new homes via incentives. But there are indications that—just as builders show increased confidence—more are also choosing to set those incentives aside. The share of builders reducing home prices dropped to 27% in May, down from 30% in April, 31% in February and March, and 36% last November.

The average price reduction remains at 6%—unchanged for the past four months. In May, 54% offered some type of incentive to bolster sales, down from 59% in April.

Regarding the overall economy, analysts for Fannie Mae’s Economic and Strategic Research (ESR) Group say their forecast hasn’t changed from April, with modest revisions resulting from a first-quarter 2023 Gross Domestic Product (GDP) report and an uptick in confidence from homebuilders regarding the market for new single-family homes. “Both the April employment and Consumer Price Index (CPI) reports came in close to our expectations, and the Federal Reserve delivered an anticipated 25 basis point rate hike at its last meeting,” the group’s analysts say. “Therefore, our outlook remains largely unchanged, including our expectation of a modest recession beginning in the second half of this year.”