'Locked in' mortgage rates mean few homes on market. How new construction has been a solution.

As homebuyers continue to be frustrated this spring with the limited inventory of existing homes, at least one segment of the housing market is seeing a silver lining: new home builders.

Builder confidence in the market for newly built single-family homes in May rose five points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. This marks the fifth straight month that builder confidence has increased and is the first time that sentiment levels have reached the midpoint mark of 50 since July 2022. Scores over 50 indicate that builders view market conditions as “good” rather than “fair” or “poor.”

One reason for the limited supply of homes has been the sub-5% mortgage interest rates that 85% of current mortgage holders are locked in to, which discourages current homeowners from selling their home and buying another at today’s elevated interest rates.

Today's rates:Current mortgage rates 2023

Total housing inventory registered at the end of March was 980,000 units, up 1% from February and 5.4% from one year ago (930,000), but the country has just a 2.6-month supply of homes, far lesser than the five to six months needed for a balanced market, according to the National Association of Realtors.

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With limited inventory, more buyers are turning to new homes. Sales of newly built single-family homes rose nearly 10% in March, the Department of Housing and Urban Development and the Census Bureau reported.

In March, 33% of homes listed for sale were new homes in various stages of construction, whereas from 2000 to 2019, new homes averaged only 13%.

“With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead,” says National Association of Home Builders Chief Economist Robert Dietz.

While new home construction is taking on an increased role in the marketplace and fueling optimism among builders, they continue to face ongoing challenges to meet a growing demand for new construction, says National Association of Home Builders Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama.

“These include shortages of transformers and other building materials and tightening credit conditions for residential real estate development and construction brought on by the actions of the Federal Reserve to raise interest rates,” she says.

Builder incentives, which played a key role in attracting buyers, are also gradually slowing across the board:

• The share of builders reducing home prices dropped to 27% in May, down from 30% in April, 31% in Feb. and March, and 36% last November.
• The average price reduction remains at 6%, unchanged for the past four months.
• 54% offered some type of incentive to bolster sales in May, down from 59% in April and 62% last December.

Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY.  You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.