However, high mortgage rates continue to push up construction costs
The strong demand for new home construction boosted builder confidence in July even though elevated mortgage rates, construction costs, and limited lot availability remained a concern.
Builder sentiment in the market for newly-built single-family homes improved for the seventh consecutive month in July to a reading of 56, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The July reading also marked the highest level since June 2022.
"The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers," said NAHB chairman Alicia Huey. "At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability."
"Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle," said Robert Dietz, chief economist of NAHB.
Dietz highlighted the importance of building additional for-rent and for-sale housing to ease inflationary pressures.
"There's been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards," he said. "More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots."
Despite rising interest rates, builders continued to pull back on sales incentives as the new home construction market heats up and resale inventory options remained limited. Only 22% of builders reported cutting prices in July, down from 25% in June.
Additionally, NAHB's survey revealed that the HMI index measuring current sales conditions in July rose one point to 62, the component gauging sales expectations in the next six months fell two points to 60, and the component measuring traffic of prospective buyers increased three points to 40 – the highest reading since June of last year.
"However, the decline for the future sales expectation reading is a reminder that housing affordability continues to be challenged by elevated interest rates," NAHB noted in its news release.
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