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Midyear Builder Sentiment - 2023

Builder sentiment remains positive at the midway point in 2023 despite higher interest rates, supply-side challenges, and developed lot shortages. The National Association of Home Builders (NAHB) Housing Market Index, which measures the outlook on home sales and scores, remains positive at 56 heading into the latter half of 2023. National builders have completed their midyear earning reports highlighting opportunities and challenges that seem consistent throughout the industry. Below is a recap from the first half of 2023 as well as forecasts for the remainder of 2023 from a compilation of the nation’s top builders.

Housing Inventory

A substantial shortage of homes for sale in the US, coupled with slower housing starts that have not kept up with demand provides favorable dynamics for the new construction industry. The limited stock of existing houses available for sale is largely attributable to roughly 90% of outstanding mortgages benefitting from fixed rates under 5%, known as the lock-in effect. That is, existing homeowners are reluctant to give up their low-rate mortgages, triggering tight resale inventories. In fact, according to NAHB Chief Economist Robert Dietz, “one-third of housing inventory is new construction, compared to historical norms of a little more than 10%,” creating a windfall for homebuilders.

Net Sales

Builders saw a sharp increase in net sales from April to June when compared to the first three months of the year. New home sales spiked with the spring selling season squashing fears of a housing downturn. While some builders report utilizing higher levels of incentives to move homes, the consensus is that incentives are abating despite an elevated sales pace.

Supply Chain Issues

Continued improvements in material availability and an easing of labor constraints has builders reporting better cycle times. To lower construction costs and reduce cycle times, many builders report a continued focus on value engineering their plans, reducing the sizes of their homes, and simplifying their product offerings.

Cancellation Rates

Builders report a significant improvement in cancellation rates when compared to the latter half of 2022 and the first part of 2023. Buyers appear to have adjusted to higher interest rates.

Profit Margins

Margins remain healthy throughout the industry, with most of the nation’s top builders reporting gross profit margins from the mid to high twenties thanks to lower incentives, improved pricing power with spec inventory, and an increase in closings on higher margin homes. Forward thinking statements from the big builders predict that margins will remain or exceed current pace for the remainder of 2023.

Land and Developed Lots

Big builders remain hyper-focused on an asset-light balance sheet. Hungry for an off-balance sheet alternative, production builders are strategically aligning themselves in a unique way to own no more lots than is necessary to enhance their efficiencies and returns. This requires builders to focus on developing strategic relationships with lot developers to grow their community counts.

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