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Homebuilder sentiment inches higher, but affordability is still a problem

Key Points
  • Builder confidence rose 1 point to 63 in April in the monthly National Association of Home Builders/Wells Fargo Housing Market Index. It hit a 2018 high of 70 in May.
  • Sentiment has remained in the low 60s for the past three months. Anything above 50 is considered positive.
  • Current sales conditions increased 1 point to 69. Buyer traffic rose 3 points to 47 but is still in negative territory. Sales expectations over the next six months fell 1 point to 71.
Prospective buyers tour a new home for sale in Denver, Colorado.
Matthew Staver | Bloomberg | Getty Images

The nation's homebuilders are pleased with the strong demand they're seeing this spring, but they continue to see buyers being held back by today's high home prices.

Builder confidence rose 1 point to 63 in April in the monthly National Association of Home Builders/Wells Fargo Housing Market Index. It was at 68 last April, and then hit a 2018 high of 70 in May.

Sentiment has remained in the low 60s for the past three months. Anything above 50 is considered positive.

"Builders report solid demand for new single-family homes, but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots," said NAHB Chairman Greg Ugalde, a homebuilder and developer from Torrington, Connecticut.

Of the index's three components, current sales conditions increased 1 point to 69. Buyer traffic rose 3 points to 47 but is still in negative territory. Sales expectations over the next six months fell 1 point to 71.

Builders are trying to cater to strong demand at the entry level of the market, but only a few of the large production companies, like D.R. Horton, were really focused there during the housing recovery. More, like Pulte's Centex brand, are now turning in that direction, but the bulk of new production is still in the move-up market.

Builders have offered incentives and stripped out some higher-end amenities to bring costs down for buyers, but prices are still very high in most major markets. While they might like to build more inexpensive homes, the high costs of finished lots and skilled labor continue to make that difficult.

Mortgage rates did fall back dramatically earlier this year, but they have started to climb again. Buyers today are highly rate-sensitive, given how pricey the market is.

"Ongoing job growth, favorable demographics and a low-interest rate environment will help to modestly spark sales growth in the near term," said NAHB chief economist Robert Dietz. "However, supply-side headwinds that are putting upward pressure on housing costs will limit more robust growth in the housing market."

Looking at the three-month moving averages for regional HMI scores, the Northeast posted a 3-point gain to 51, the Midwest increased 2 points to 53, and the South was up 1 point to 67. The West remained unchanged at 69.