Builder confidence is estimated at 44%, according to the National Association of Home Builders (NAHB) Housing Market Index released this week.
HMI has risen steadily since the December 31, 2022 low. However, the future of housing is uncertain due to “interest rate volatility.”
Why is HMI changing?
Although high construction costs and high interest rates continue to hamper housing affordability, the lack of existing inventory is shifting demand to the new domestic market, according to NAHB.
Construction costs now account for 60.8% of a home’s price, according to a separate NAHB study (see below).
“Even as builders continue to deal with persistently high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers wait for lower interest rates and turn more to the new domestic market due to a shortage of existing products. inventory,” said NAHB President Alicia Huey, a Birmingham, Ala.-based custom home builder and developer. “But given the recent concerns about the instability of the banking system and the volatility of interest rates, builders are highly uncertain in the near to medium term. »
NAHB Chief Economist Robert Dietz said builders are also challenged by the availability of building lots, as well as restrictions on the acquisition, development and construction of those lots. He said the cost and affordability of housing inventory continue to be “significant constraints” for prospective home buyers.
“For example, 40% of builders in our March HMI survey currently report that lot availability is poor,” Dietz said. “And the continued impact of pressure on regional banks, along with continued Fed tightening, will further limit the ability to acquire, develop and build loans for builders across the nation.”
When AD&C loan terms are tight, lot inventory shrinks and adds an additional barrier to housing affordability, Dietz explained.
How is the index calculated?
The NAHB/Wells Fargo HMI is a weighted average of three separate component indices: Current single-family sales, single-family sales for the next six months, and traffic from prospective buyers. Each month, a group of builders rates the first two on a scale of “good”, “fair” or “poor”, and the latter on a scale of “high to very high”, “average” or “low to very low”. . An index is calculated for each series using the formula “(good – bad + 100)/2” or for “Traffic” the formula “(high/very high – low/very low + 100)/2”.
HMI distribution for March 2023
The NAHB March report measured three components:
- Single Family Homes Selling Now – 49%
- Single family home sales over the next six months – 47
- Traffic from potential buyers – 31%
A total of 44% HMI is the average of those three components.
Regional HMI Breakout
The South and North-East continue to lead in builder confidence. Here are the numbers.
- south 50%
- Northeast 46%
- West 36%
- Midwest 35%
Calculations of construction costs
The NAHB recently conducted a survey to calculate the degree to which construction cost contributes to a home’s sales price.
Based on 2022 figures, 60.8% of a home’s sales price is construction cost, according to the study.
That percentage is only the fourth time since 1998 that construction spending has exceeded 60%.
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