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Homebuilder Sentiment Surges in July, though Builders Caution on Impact of Rising Mortgage Rates

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Builder Sentiment in the Market for Single Family Homes Rises to Highest Level Since June 2022

Rising Demand for New Construction Driven by Low Supply in Resale Market

Builder sentiment in the market for single family homes rose one point in July to 56, according to the National Association of Home Builders/Wells Fargo Housing Market Index. This marks the seventh straight month of gains and the highest level since June 2022. Builders attribute this increase to the low supply in the resale market, which is driving demand for new construction. However, higher mortgage rates and supply-side challenges continue to put pressure on the market.

Mortgage Rates and Affordability Concerns

Builders have expressed caution about market conditions due to a quarter-point rise in mortgage rates over the past month. The average rate on the popular 30-year fixed mortgage briefly crossed over 7% in May and again at the end of June. Although it has come down slightly in the last week, these higher rates are straining affordability in the market. Prices for existing homes are rising once again, affecting buyers' ability to afford homes.

Components of the NAHB Index

The NAHB index consists of three components: current sales conditions, buyer traffic, and sales expectations in the next six months. In July, current sales conditions rose one point to 62, indicating a positive sentiment in the market. Buyer traffic increased three points to 40, which is the highest reading since June of last year. However, sales expectations in the next six months fell two points to 60 due to the jump in interest rates and its impact on affordability.

Builders Using Fewer Incentives

Despite the higher mortgage rates, builders are using fewer incentives. In July, only 22% of builders reported cutting prices, which is a decrease from 25% in June and 27% in May. This suggests that builders are confident in the demand for new construction and are not relying on price reductions to entice buyers.

Sales of Newly Built Homes

Sales of newly built homes in May, according to the U.S. Census Bureau, showed a significant increase compared to the previous month and a year ago. In May, sales jumped 13% compared to April and were 20% higher than May 2022. However, the median price of these homes was down over 7% from the previous year. It is important to note that this median price may be skewed by the mix of homes being sold, which is currently leaning toward the lower end.

What Does Builder Sentiment Mean for New Business?

The rising builder sentiment in the market for single-family homes, driven by low supply in the resale market, has important implications for new businesses entering the construction industry. While there is an opportunity for growth, the challenges of higher mortgage rates and supply-side issues should not be overlooked.

One key consideration for new businesses entering the market is the impact of mortgage rates and affordability concerns. With rates increasing and prices for existing homes rising, affordability becomes a significant hurdle for potential buyers. This means that new businesses must be strategic in their pricing and financing options to attract customers amid these market conditions. Offering competitive rates and exploring innovative financing solutions may be essential for success.

Another factor to consider is the components of the NAHB Index, which provide insights into market sentiment. While current sales conditions and buyer traffic show positive signs, sales expectations in the next six months have dipped due to the jump in interest rates and its impact on affordability. New businesses must carefully monitor these indicators and adapt their strategies accordingly, focusing on building strong relationships with buyers and effectively managing expectations.

Furthermore, the decreased use of incentives by builders suggests confidence in the demand for new construction. This means that new businesses should prioritize providing high-quality, competitive offerings rather than relying on price reductions to attract buyers. Investing in exceptional craftsmanship, innovative designs, and desirable features can help set new businesses apart in a crowded market.

In conclusion, the rising builder sentiment presents both opportunities and challenges for new businesses in the construction industry. By strategically managing pricing and financing, monitoring market sentiment indicators, and prioritizing quality, new businesses can position themselves for success in a market driven by low supply and increasing demand.

Article First Published at: https://www.cnbc.com/2023/07/18/homebuilder-sentiment-rises-in-july.html

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