Homebuilder confidence continued to increase in January, rising four points to a score of 48 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).
Expectations that mortgage rates will continue to moderate in the coming months, the prospect of future rate cuts by the Federal Reserve later this year, and a protracted lack of existing inventory helped provide a boost to builder sentiment for the third straight month, NAHB says.
“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” says Alicia Huey, chairman of NAHB, in a statement. “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.”
“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5 percent this year,” says Robert Dietz, chief economist for NAHB. “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.”
With mortgage rates now below 7% since mid-December, more builders are cutting back on reducing home prices to boost sales. In February, 25% of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023.
However, the average price reduction in February held steady at 6% for the eighth straight month. Meanwhile, the use of sales incentives is also diminishing. The share of builders offering some form of incentive dropped to 58% in February, down from 62% in January and the lowest share since last August.
In a separate statement, Selma Hepp, chief economist for CoreLogic, says “homebuilder sentiment is being boosted by the decline in mortgage rates and gradual improvements in housing fundamentals overall.”
“Improvement in housing affordability resulting from lower rates is helping drive entry level demand once again,” Hepp says. “Taken together, stronger homebuilder activity of single-family homes should mean more available inventory for potential buyers and less pressure on home prices than in the heat of the pandemic.”
Photo: Annie Gray