Builder confidence inches up as developers brace for lending anxiety

Inman News

Builder confidence rose 2 points in the latest National Association of Home Builders’ Housing Market Index, but economists fear lending challenges in the wake of bank failures this month

Builder sentiment logged a slight increase in March, but the future remains shrouded in uncertainty as developers brace for hurdles resulting from the fallout from the abrupt failures of Silicon Valley Bank and Signature Bank, new data released Wednesday from the National Association of Home Builders shows.

Builder sentiment for single-family homes rose two points on the Wells Fargo/National Association of Home Builders Housing Market Index , to 44, marking the third straight monthly increase, according to the data.

New homebuilders encountered pent-up demand in the early months of 2023, the NAHB said, but how the rest of the year will play out is uncertain after mortgage rates have risen again.

“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,” NAHB Chairman Alicia Huey said in a statement. “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.”

Stress on the banking sector resulting in the failures of Silicon Valley Bank and Signature Bank has temporarily reduced long-term interest rates, which will likely improve home sales in the short-term. But homebuyers are still contending with low inventory and high costs.

“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 homebuyers,” NAHB Chief Economist Robert Dietz said in a statement. “For example, 40 percent of builders in our March HMI survey currently cite lot availability as poor.”

Increased pressure on regional banks will also effect builders’ ability to secure loans, Dietz pointed out, which will further effect affordability.

“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 loans for builders across the nation,” he said. “When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability.”

The index is derived from a monthly survey of homebuilders that asks builders to rate perceptions of current single-family home sales and sales expectations as “good” “very good” or “poor” and buyer traffic as “high to very high,” “average” or “low to very low.”

The index tracking current sales condition in March rose two points to 49, the measure of prospective buyers increased three points to 31 while the gauge of sales expectations fell one point to 47, according to the NAHB.