Homebuilder sentiment rises in May thanks to strong demand and tight housing supply

Strong demand and a slim supply of affordable, existing homes for sale has the nation’s homebuilders feeling better about their business.

A monthly index of builder sentiment rose 2 points in May, 1 point higher than analysts expected. The National Association of Home Builders sentiment index now stands at 70. Anything above 50 is considered positive. April’s reading was revised down 1 point to 68. The index stood at 69 in May 2017.

“The solid May report shows that builders are buoyed by growing consumer demand for single-family homes,” said NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, Louisiana. “However, the record-high cost of lumber is hurting builders’ bottom lines and making it more difficult to produce competitively priced houses for newcomers to the market.”

Prices for newly built homes continue to rise, as builders focus more on the move-up market as opposed to the entry level, where so much of the demand currently exists from millennial homebuyers. Builders point to higher costs for land, labor and materials, as making it too difficult to profit on low-priced homes.

Of the NAHB index’s three components, current sales conditions increased 2 points to 76 in May. Buyer traffic and sales expectations in the next six months remained unchanged at 51 and 77, respectively.

“Tight housing inventory, employment gains and demographic tailwinds should continue to boost demand for newly built single-family homes,” said Robert Dietz, chief economist of the NAHB. “With these fundamentals in place, the housing market should improve at a steady, gradual pace in the months ahead.”

On a three-month moving average for regional scores, the West and Northeast held unchanged at 76 and 55, respectively. The South and Midwest each fell 1 point to 72 and 65.