Homebuilder sentiment at highest level since last summer 

Homebuilders are becoming increasingly optimistic about the state of the housing market, which could mean good news for inventory later this year.

Survey details: Builder confidence rose three points to 51 in March, according to the National Association of Home Builders. It's the fourth consecutive month of increasing confidence, and the first time the sentiment level has passed the breakeven point on the 100-point scale since last July.

Higher homebuilder sentiment last summer led to a bump in building permits and housing starts in the fall, helping new home construction grab a slightly bigger share of the overall inventory. 

And with new home sales off to a strong start in 2024, builders may have more reason to feel more confident about the year ahead.

Strong economic data: The U.S. Census Bureau reported housing starts, completions and building permits were up in February. 

The March 19 report noted that February housing starts rose 5.9% compared to a year ago. Housing completions were up 9.6% year-over-year and building permits increased 2.4% for the same period.

"The tale of two markets continues, as the new-home market continues to outperform the existing-home market," said Odeta Kushi, deputy chief economist for First American. "Builders have benefited from the lack of resale inventory and from their ability to use incentives, such as mortgage rate buydowns, to entice buyers off the sidelines. Builders have a huge competitive advantage over the resale market in this way."

What's driving this optimism? The two big factors influencing the housing market as a whole — inventory and mortgage rates — are playing out in the new home segment as well.

Although up compared to last year, existing home inventory remains well below pre-pandemic levels, and average 30-year mortgage interest rates have not yet crested the 7% mark this year.

And, despite a strong economy, rates are still expected to drop later this year, said Robert Dietz, chief economist at the NAHB. The combination of those factors is likely boosting buyer interest in new homes.

With more potential buyers out there, builders are now less likely to slash home prices to increase sales. In March, just 24% of builders reported cutting home prices, down from 36% in December, Dietz said.

While the market is looking rosier on the construction front, builders are still dealing with a number of issues.

"Builders continue to face several supply-side challenges, including a scarcity of buildable lots and skilled labor, and new restrictive codes that continue to increase the cost of building homes," Dietz said. "Building materials will also face upward pressure on prices as home building activity expands."

Regional outlook: Builders in the Northeast were the most optimistic, with a sentiment score of 59. The South came in at 50, while the West and Midwest were still below the midpoint at 43 and 41, respectively. However, builders in each of the four regions were more optimistic in March than in February.