Homebuilder Confidence Rising, Construction Backlog Plentiful

Positive sentiment is building when it comes to single-family home development and construction projects overall.

A fifth consecutive month of gains in the National Association of Home Builders/Wells Fargo Housing Market Index for May took the index out of negative territory for the first time since July to sit at a modest 50.

Meanwhile, the Associated Builders and Contractors reported this week that its Construction Backlog Indicator and Construction Confidence Index reading for sales and staffing moved higher in April, putting all three readings above 50 – a sign of expected growth in the next six months.

The CBI rebounded in April due to strength in infrastructure projects after declining to a seven-month low in March.

Erica Bose, Partner, Cox, Castle & Nicholson, tells GlobeSt.com that some of her homebuilding clients have reported an improved outlook for the sector compared to several months ago due to the continued increase in month-over-month home closings in April, but have continued to offer rate buydowns and sales incentives in many regions.

“They are finding that homebuyers have started prioritizing sales incentives over rate buydowns instead of the opposite, which is what builders were seeing in the first couple of months of 2023,” Bose said.

“This indicates that the sticker shock of increased interest rates is wearing off and may also signal that homebuyers may be anticipating the ability to refinance at a lower interest rate in the next few years, which perhaps may result in them prioritizing a home upgrade like a finished basement room or high-end kitchen appliances over a lower interest rate on their mortgage.”

Rick Beck, owner/founder of Rick Beck Real Estate and Rick Beck Luxury Properties, based in Southern California, said that currently, even with unprecedented interest rate hikes by the Fed during the past 14 months, supply has not filled demand, causing prices in some markets to remain at all-time highs.

“I tell buyers to be patient because the Fed is almost always 6 months to a year behind in the data they adjust to, and most of the buyers have lost five or more homes in multiple offers over the last year or so due to a lack of supply,” Beck said.

“This has created a situation where supply must fill demand going back 12 to 18 months or more. That said, the buyers today are discouraged because they are paying twice the monthly payment for two-thirds of the home from a year ago.”

And ABC Chief Economist Anirban Basu said based on member sentiment that “one would not be able to discern that interest rates are high, the nation’s banking sector is in tumult, politicians are arguing over the nation’s debt limit and recession fears remain pervasive.

“Despite many headwinds and an active news cycle, contractors continue to express confidence in the near term.”