Builder confidence in the market for newly built single-family homes saw an increase of three points, reaching a level of 37 in December, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This rise in confidence comes as mortgage rates have fallen, leading to increased interest from prospective buyers.
“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”
NAHB Chief Economist Robert Dietz said that the housing market has likely passed the peak of mortgage rates for this cycle. This development is expected to stimulate homebuyer demand in the coming months, as indicated by a six-point increase in the HMI component measuring future sales expectations for December.
Dietz acknowledged the temporary divergence between builder sentiment and construction activity seen in recent months.
“Our statistical analysis indicates that temporary and outsized differences between builder sentiment and starts occur after short-term interest rates rise dramatically, increasing the cost of land development and builder loans used by private builders,” Dietz said. “In turn, higher financing costs for home builders and land developers add another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market. Looking forward, as rates moderate, this temporary difference between sentiment and construction activity will decline.”
Despite improvements in builder confidence, many builders have had to reduce home prices to drive sales, especially as mortgage rates remained above 7% throughout November. In December, 36% of builders reported lowering home prices, matching the previous month's high point for 2023. The average price reduction remained at 6%, unchanged from the prior month. Additionally, 60% of builders offered sales incentives in December, a slight decrease from 62% in October but consistent with November.
Alex Toth, head of business development for Opendoor, said the data he's looking at anticipates a 5% increase in housing starts and while construction jobs remained flat in November, he says builders are looking to build more with their current workforce.
He said they anticipate builder incentives to taper off a little bit as rates decline, but it will be harder in places where housing prices have increased at a rapid rate over the past year.
The NAHB/Wells Fargo HMI is based on a monthly survey that has been conducted for over 35 years. It assesses builder perceptions of current single-family home sales and sales expectations for the next six months, as well as traffic of prospective buyers. The index is seasonally adjusted, with a score exceeding 50 indicating that more builders view conditions as favorable.
The HMI components for December showed an increase of three points to 24 for the index measuring traffic of prospective buyers, a six-point rise to 45 for sales expectations in the next six months, and a steady reading of 40 for the index charting current sales conditions.
Regarding regional HMI scores, the Northeast increased by two points to 51, the Midwest decreased by one point to 34, the South declined by three points to 39, and the West saw a four-point drop to 31 in the three-month moving averages.
