Low inventory may not be good for potential homeowners shopping for a home but it’s keeping builders feeling a bit more confident that there are buyers eager for new single-family homes.

This was the conclusion from the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) just released this month. This cautious optimism is in spite of the industry being realistic about working at a time when it’s been hit with multiple challenges: higher mortgage rates, labor costs, more expensive materials (but lumber is back to pre-pandemic levels), sometimes still not enough inventory of certain products and systems and a scarcer supply of lots.

Overall, however, builder confidence for newly built single-family homes this month posted a one-point gain to 56, according to the HMI. This represents the seventh straight month that builder confidence has climbed and is the highest level since June of last year.

Who’s out shopping for new homes? Those who aren’t priced out of the market and have funds for a down payment, monthly mortgage, other housing related expenses and who have been unable to find and afford resale inventory, said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.

“At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability,” she added.

NAHB Chief Economist Robert Dietz provided his insight about the quarter-point rise in mortgage rates over the past month, calling it “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.” To ease inflationary pressure from housing, Dietz said, the best solution is to build more for-rent and for-sale housing. “More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and develop lots,” he said.

The HMI Index looked at and compared other numbers too: the current sales conditions this month rose one point to 62, the component charting sales expectations over the next six months fell two points to 60 and the gauge measuring traffic of potential buyers increased three points to 40, the highest reading since June of last year. But the sales expectation decline brings home the point that higher interest rates continue to challenge housing affordability.

The index also provided the three-month moving averages for different regions: the Midwest went up two points to 45, the West climbed five points to 51, the Northeast was up five points to 52 and the South was up three points to 58.

Source: “Builder Confidence Rises Despite Rising Rates, Material Costs, Labor and Lot Inventory