Although high construction costs and elevated interest rates continue to hamper housing affordability, builders expressed cautious optimism in March as a lack of existing inventory is shifting demand to the new home market. 

Builder confidence in the market for newly built single-family homes in March rose two points to 44, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the third straight monthly increase in builder sentiment levels.

“Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers are waiting for interest rates to drop and turning more to the new home market due to a shortage of existing inventory,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama. “But given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook.”

“While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers,” said NAHB chief economist Robert Dietz. “For example, 40% of builders in our March HMI survey currently cite lot availability as poor. And a follow-on effect of the pressure on regional banks, as well as continued Fed tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation. When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability.”

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index gauging current sales conditions in March rose two points to 49 and the gauge measuring traffic of prospective buyers increased three points to 31. This marks the strongest traffic reading since September of last year. The component charting sales expectations in the next six months fell one point to 47.

Looking at the three-month moving averages for regional HMI scores, the Northeast rose five points to 42, the Midwest edged one-point higher to 34, the South increased five points to 45 and the West moved four points higher to 34.