Strong home-buying demand boosts builders' business outlook to the highest level since June 2022

By Aarthi Swaminathan

Lack of resale inventory fuels builder optimism about future business

The numbers: A persistent shortage of previously owned homes for sale is fueling builders' optimism, with a key indicator of their confidence rising for the seventh month in a row in July.

With mortgage rates at nearly 7%, many homeowners were finding little incentive to sell, and new listings were down 27% from a year ago, according to Realtor.com.

That has boosted interest in new homes and given builders reason to remain confident about their outlook. The National Association of Home Builders' (NAHB) monthly confidence index rose by one point in July, to 56, the trade group said on Tuesday.

It was the seventh month in a row that sentiment has improved among builders and the highest level since June 2022.

A year ago, the index stood at 55.

Key details: Builders continued to pull back on sales incentives amid strong interest from home buyers. The share of builders cutting prices to boost sales has dropped to 22% in July, from a peak of 36% in November 2022.

The three gauges that underpin the overall builder-confidence index were mixed:

Big picture: For the last few months, new homes have been a bright spot in the housing market, as builders are able to meet home-buying demand amid a scarcity of listings of previously owned homes.

But builders were also worried about how much longer they can keep up, as they said they foresee possible speed bumps that may slow construction, such as a shortage of lots to build homes on as well as a lack of electrical-transformer equipment. They were also worried about mortgage-interest rates rising to 7% and how that could affect demand.

What the NAHB said: "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," Robert Dietz, chief economist at the NAHB, said in a statement.

Market reaction: The yield on the 10-year Treasury note was around 3.7% on Tuesday morning.

The SPDR S&P Homebuilders exchange-traded fund (XHB) traded higher during the morning session, as did big home-builder stocks like D.R. Horton Inc (DHI), Toll Brothers (TOL) and Lennar (LEN).

-Aarthi Swaminathan

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07-18-23 1046ET

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