Homebuilders – through no fault of their own – present a less affordable product.
And they are losing confidence in their own market. According to a report from the National Association of Home Builders (NAHB) on April 18, their confidence in the market fell by 2 points to 77. This is the fourth month in a row (Jan 83, February 81, March 79) that their level confidence has gone down.
NAHB conducts a monthly survey of its members. Members are asked to assess market conditions for the sale of new detached homes now and over the next 6 months. They are also asked to evaluate their predictions on the traffic of potential buyers.
Here are the results:
- Current New Home Sales: The rating in April was 73 (82 in January).
- New Home Sales for the next 6 months: The rating in April was 73 (82 in January).
- Traffic from potential buyers: The rating in April was 60 (69 in January).
Homebuilder Confidence Falls for 4th Month – NAHB Report
The median cost of a new single-family home is now over $400,000.
Factors affecting the affordability of new homes include:
- Sharp rise in mortgage interest rates, now at 5%, the highest in a decade.
- Higher construction costs, due to higher material costs
- Supply chain disruptions, leading to slower completion times and lower inventory
NAHB President Jerry Konter and NAHB Chief Economist Robert Dietz said the housing market is reaching an “inflection point,” or a period of significant change.
“The market will soften,” he predicted. “Buyers learn to be patient and strategic.”
“We’ve argued over the past 5 years that homebuilders have faced increasing supply-side constraints,” Dietz said. “And it’s not just in terms of materials.
“We are looking at the 5 Ls,” he added. “Labour, timber, lots (availability of building land), loan, and legal/regulatory impediments.”
Dietz said the cost of building materials — lumber — is the biggest influencer, with an increase of about 30% since the pandemic.
“It costs more and takes longer (to build a house),” Dietz said. “It’s going to be expensive for entry-level first-time home buyers.”
How can home builders adapt?
Dietz said the rise of the hybrid work model has shifted demand for housing to suburban and rural areas. Workers who wouldn’t commute daily began to broaden their search for housing, where they could get more bang for their buck, Dietz said.
Homebuilders can respond to this trend, he advised.
“The hybrid work model creates a shift in geographic shopper research,” Dietz said. “Homebuilders can also expand and do business in places where the population is growing.”
The supply of resale homes is quite tight with less than two months supply, he added. In a “normal” market, the resale supply would be 4 to 6 months, he said.
“When there is demand, building homes would make up the difference,” Dietz said. “It’s much more difficult, but the work will be there.”
How NAHB does its research
Derived from a monthly survey conducted by NAHB for more than 35 years, the NAHB/Wells Fargo HMI rates builders’ perceptions of current single-family home sales and sales expectations for the next six months as “good,” passable” or “poor.” The survey also asks builders to rate traffic from potential buyers as “high to very high”, “medium” or “low to very low”. The scores for each component are then used to calculate a seasonally adjusted index where any number above 50 indicates that more builders rate the conditions as good than bad.
The HMI index assessing current selling conditions fell two points to 85 and the component representing traffic from potential buyers posted a six-point drop to 60. The gauge measuring expectations of sales over the next six months rose three points to 73 after falling 10 points. in March.
Looking at the three-month rolling averages of regional HMI scores, the Northeast posted a one-point gain to 72 while the Midwest fell three points to 69, the South fell two points to 82 and the West fell slightly by one point to 89.
HMI tables are available on nahb.org/hmi. More information on housing statistics is also available on Housing Economics PLUS (formerly housingeconomics.com).