Builder confidence in the housing market for newly constructed single-family homes has seen a rise for the third consecutive month, buoyed by the anticipation of moderating mortgage rates and potential Federal Reserve rate cuts later in the year.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for February surged four points to 48, marking its highest level since August 2023. This uptick reflects growing optimism among builders, despite ongoing challenges in the market.
“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.”
Will Holmes, head of partnerships at Opendoor, said he doesn't believe it's misplaced optimism, but the data does lag a little and the market was volatile at the beginning of the year.
"Overall, builders are cautious and sophisticated," Holmes said.
NAHB Chief Economist Robert Dietz provided a forecast that suggests a modest recovery for the housing sector, expecting single-family starts to increase by about 5% this year.
"But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year," Dietz said.
In response to the recent dip in mortgage rates below 7% since mid-December, builders have started to scale back on price reductions, a strategy previously employed to stimulate sales.
In February, 25% of builders reported reducing home prices, a decrease from 31% in January and 36% in the final months of 2023. Despite this trend, the average price cut remained at 6% for the eighth consecutive month. Additionally, the prevalence of sales incentives offered by builders is on a decline, with 58% reporting the use of such incentives in February, down from 62% in January.
The HMI, derived from a monthly survey that NAHB has conducted for over 35 years, assesses builder perceptions of current single-family home sales and sales expectations for the next six months, along with the traffic of prospective buyers. A reading above 50 on this index indicates more builders view conditions as good rather than poor.
The detailed breakdown of the HMI indices for February shows an increase across all major components. The index for current sales conditions rose four points to 52; the index for sales expectations over the next six months climbed three points to 60, and the index measuring traffic of prospective buyers improved four points to 33.
Regional three-month moving averages also saw increases, with the Northeast up three points to 57, the Midwest up two points to 36, the South up five points to 46, and the West up six points to 38, underscoring a cautious optimism for the housing market's trajectory in 2024.
