Homebuilder confidence is at its highest level since July 2022

Confidence among single-family homebuilders in the U.S. hit a 10-month high and improved in May for the fifth straight month, as limited home stocks helped renew optimism in the sector.

Data released Monday showed that the National Association of Home Builders/Wells Fargo measure of construction sentiment increased five points to 50, marking the first time the reading has reached the halfway mark of 50 since July 2022. A reading over 50 indicates that more The builders are watching the conditions to be good.

The scale also exceeded expectations. Economists surveyed by Bloomberg called for a reading of 45.

“New home construction is playing an increasing role in the market because many homeowners with loans well below current mortgage rates choose to stay, and this keeps the supply of existing homes at a very low level,” said NAHB Chair Alicia Huey. , a custom home builder and developer from Birmingham, Ala.

While this is fueling cautious optimism among builders, they continue to face ongoing challenges to meet the growing demand for new construction. These include shortages of transformers and other building materials and the tightening of credit terms for residential development and construction that resulted from actions by the Federal Reserve to raise interest rates.

Other metrics indicated that builders gain an advantage.

In May, just 27% of builders cut home prices, down from 30% in April, 31% in February and March, and 36% in November, NAHB found.

The average price reduction remained at 6%, unchanged from the past four months, while 54% of homebuilders offered some type of incentive to boost sales in May, down from 59% in April and 62% in December.

Last month, DR Horton CEO David Auld said on the company’s recent earnings call that the spring selling season was an “encouraging start” and that the builder posted a 73% increase in net sales from the prior quarter. DR Horton (DHI) and PulteGroup (PHM) both posted better-than-expected results in the first three months of the year.

Optimism supports stock conditions favoring builders.

“Existing inventory shortages continue to drive buyers into new construction,” NAHB chief economist Robert Dietz wrote in a statement.

In March, 33% of homes for sale were new homes in various stages of construction. That share from 2000-2019 averaged 12.7%. He added that with a limited stock of housing available, new construction will continue to be an important part of the search for potential buyers in the coming quarters.

Sales conditions posted gains in May, rising to 56, and sales forecasts for the next six months rose to 57. A gauge of incoming buyers’ movement increased 2 points, to 33.

Building sentiment increased in May across three regions in the Midwest, South and West, while it remained flat in the Northeast.

A housing project under construction in Eagleville, Pennsylvania, on April 28, 2023 (AP Photo/Matt Rourke, File)

However, headwinds for builders remain.

Unresolved supply chain issues continue to affect construction. Separately, some homebuilders are hesitant about tighter credit terms affecting future housing projects, according to a report from Zonda.

Last week, a Federal Reserve survey reported that lenders are making it difficult for consumers and businesses to get a loan after the bank collapsed in March. The release also came on the heels of the Federal Reserve’s 10th consecutive rate hike earlier this month that drove up borrowing costs for construction.

Homebuyers also remain price sensitive, especially as home prices begin to rise again, worsening affordability.

But the recent modest decline in mortgage rates boosted sentiment, with housing confidence among Americans reaching the highest level in a year.

The average 30-year mortgage rate was 6.35% last week, down from 6.39% the week before, and marking the second consecutive weekly decline, according to Freddie Mac.

Danny Romero is a reporter at Yahoo Finance. Follow her on Twitter @employee

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