Why homebuilders remain confident in spite of high interest rates

New data on homebuilder confidence comes out today, and home builders have reasons to be optimistic. Some supply chain issues from the pandemic era have been resolving, existing home inventory is at historic lows, and homebuilders have the advantage of offering buyers lower rates at a time when mortgage interest is still pretty high.

“Yeah, the housing market is really a tale of two markets right now,” says Danielle Hale, chief economist at Realtor.com. “Because of the lack of existing homes for sale, buyers who are looking for options are often finding them among new construction.”

New homes usually make up about 10%-15% percent of the housing market overall, according to Hale. But currently they’re up to almost a third. 

“New home sales are close to the highest share of the market that they’ve been in probably more than a decade,” says Hale.

“People get frustrated, there’s nothing good out there,” says Logan Mohtashami, lead analyst for the news site HousingWire. “They see this beautiful new home, they go, OK, we’re going in.”

He says it’s more than just lopsided inventory issues at play here. Homebuilders have the flexibility to subsidize mortgage rates for buyers. 

“They’re saying hey, listen, we can get you under 6% mortgage rates all day long,” Mohtashami says. “Why are you going to waste your time, you know, fighting in a low inventory market with 7% rates.”

And it seems to be working. Homebuilder confidence has been trending up every month of this year.

“At least in the near term, builders, I think, are cautiously optimistic,” says Robert Dietz, chief economist for the National Association of Home Builders.

But builders do still face some problems, says Dietz, “Including getting access to appliances and electrical transformers and the rising price of some kinds of building material costs, including concrete and wood products.”

And, Dietz says, with low unemployment levels, there’s also a shortage of skilled labor in the construction industry. 

But he’s not too concerned. New home sales are up 20% compared to where they were a year ago. And the industry is starting to reach out to younger, lower-income buyers by offering some new homes at $300,000 or less.

“That’s an excellent way to expand the new construction market to a younger set of households, renters, who are aspiring to become first time homebuyers,” says Dietz. “The trick is finding a way to make it all budget out.”

For now, home builders are making it work. And feeling pretty good about it.