The housing market is strong for the first time in nearly a year, leading homebuilders to turn bullish

Home builders are displaying a renewed sense of optimism regarding the housing market outlook, marking the first time in nearly a year that their sentiment has improved. The shortage of previously-owned home sales is a key factor contributing to builders' increased confidence.

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With mortgage rates surpassing 6%, homeowners are finding little motivation to sell. According to a survey conducted by Redfin, approximately 92% of homeowners have an outstanding mortgage with a rate below 6%. Moreover, 23.5% of homeowners have a mortgage rate of less than 3%. Consequently, there has been a significant decline of 22% in the number of new home listings compared to the same period last year, as reported by Realtor.com in their housing trends report.

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As a result, home builders are experiencing a positive outlook for their business. The National Association of Home Builders (NAHB) announced that their monthly confidence index rose by 5 points to reach 55 in June, marking the sixth consecutive month of improved sentiment among builders. Moreover, this is the first time in 11 months that builder confidence has surpassed the threshold of 50, entering positive territory.

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The June reading of 55 represents the highest level since July 2022, when the index stood at 67. Builders have also started reducing sales incentives, with the percentage of builders cutting prices to boost sales dropping to 25% in June from a peak of 36% in November 2022. The NAHB reported that the average price reduction by builders in June was 7%.

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All three components of the builder-confidence index exhibited positive growth. The reading on current sales conditions increased by 5 points, the measure on future sales gained 6 points, and the gauge of traffic from prospective buyers rose by 4 points.

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In a broader context, the housing industry is grappling with a severe supply shortage due to pandemic-era monetary policies that have driven down mortgage rates. While this poses challenges for home buyers, real estate agents, and mortgage brokers, builders seem to be among the few participants benefitting from the supply crunch, given their involvement in new construction projects. As a result, the homebuilder ETF, XHB, has experienced a year-to-date increase of 25%.

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The NAHB stated that "a bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year." Additionally, the NAHB's statement mentioned that with the Federal Reserve nearing the end of its tightening cycle, future market conditions in terms of mortgage rates and financing costs for builder and developer loans are expected to be favorable.

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