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Homebuilder confidence up again as demand for new construction continues

Homebuilders are still going strong.

Builder confidence was positive again in July, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

The index reading rose to 56 from 55 in June, marking the seventh consecutive month that sentiment increased and marking the highest level since June of last year. Economists polled by Bloomberg were also anticipating a 56 reading for July.

The continued enthusiasm reflects the strength of the newly constructed home market, combined with tight supplies of existing homes. That has tipped the scale in favor of builders. However, challenges still remain from higher mortgage rates to materials and supplies, like new appliances, which are becoming harder to stock up on.

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“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, a custom home builder and developer from Birmingham, Ala.

“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,” Huey added.

Robust traffic

Mortgage rates have hovered around 7%, raising concerns for potential buyers. Higher rates have kept homeowners from listing — squeezing inventory tight and propping up home prices.

The NAHB gauge measuring traffic of prospective buyers increased 3 points to 40, the highest reading since June of last year.

“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,” NAHB chief economist Robert Dietz wrote in the press release.

The average rate on the 30-year fixed mortgage increased to 6.96% from 6.81% the week prior, Freddie Mac reported. Meanwhile, even under these elevated rates, builders have powered demand by “selectively” incentivizing with rate buydowns.

In July, builders offering incentives to buyers dropped as the lack of supply remains tight, according to the NAHB. Still, about 22% of builders report cutting prices in July, down from 25% in June and 27% in May.

Shortage of resale homes

Higher mortgage rates have a chokehold in the housing market as fewer properties were listed.

“Available inventory strongly impacts home sales, too,” NAR chief economist Lawrence Yun said in a statement last month. “Newly constructed homes are selling at a pace reminiscent of pre-pandemic times because of abundant inventory in that sector. However, existing-home sales activity is down sizably due to the current supply being roughly half the level of 2019.”

The deficit of supply has pushed home prices up as some homes sell above their listed price for the first time in almost a year, Redfin reported. The number of homes for sale dropped 15% to an all-time low in June, the biggest decline in two years.

A worker is shown on the roof of a house he is building against a blue cloudy sky.
Boom times? A new home development in Phoenix. (Photo by Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

This has been a positive signal for homebuilders. The NAHB measure shows current sales conditions rose for the month to 62, but sales expectations for the next six months slid 2 points to 60 in July as housing affordability continues to be challenged by elevated interest rates.

While the US is short by 1.7 million homes, according to data gathered by Chris Porter, chief demographer at John Burns Research and Consulting, construction hasn’t stopped. Some experts, including Dietz, warn that this could spill into the inflationary picture.

“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.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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