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U.S. homebuilders are expecting stronger sales ahead, but mortgage applications for newly built homes don't currently support that hope.
After slipping in April, homebuilder sentiment rose 2 points in May to the second-highest level since the recession. Sentiment now stands at 70 on a monthly index from the National Association of Home Builders. Anything above 50 is considered positive sentiment. The index was at 58 in May of last year.
"This report shows that builders' optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor," said NAHB Chairman Granger MacDonald, a homebuilder and developer from Kerrville, Texas.
Of the index's three components, sales expectations over the next six months saw the biggest gain, rising 4 points to 79. That is the highest level since June 2005. Current sales conditions also rose 2 points to 76. The components measuring buyer traffic, however, fell 1 point to 51.
Homebuilder sentiment may be rising, but single-family housing starts have not seen strong gains, and entry-level, mortgage-dependent homebuyers are clearly struggling with weakening affordability. Mortgage applications to purchase a newly built home fell 4.3 percent in April, compared with April 2016, according to the Mortgage Bankers Association. That is the first annual drop this year. Applications plummeted 20 percent from March, although the MBA's index does not include any seasonal adjustments.
"A relatively strong March may have pulled forward some applications from April, exacerbating the normal seasonal falloff," said Lynn Fisher, MBA's vice president of research and economics. "On net, year-to-date applications for new homes are running about 3 percent above the same period from 2016. Despite steady demand for housing, homebuilders continue to face rising costs for labor and materials, which will continue to moderate the pace of building."
Newly built homes are more expensive than comparable existing homes, and builders are not focused on entry-level product. While some companies are now moving toward lower-priced models, most are still priced well above $200,000, which is roughly the national median price for an existing home.
On a three-month moving average, homebuilder sentiment in the Northeast and South each rose 3 points to 49 and 71, respectively. In the West, the index rose 1 point to 78 and the Midwest was unchanged at 68.