During January, the home builder confidence level had its largest monthly increase in nearly 10 years.
That’s according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index released February 15. Builder confidence in the market for newly-built single-family homes rose seven points to 42.
Including January’s report, that’s two consecutive solid monthly gains for builder confidence, spurred in part by easing mortgage rates.
NAHB Chair Alicia Huey said that the increase in builder confidence could be a sign that the housing market is turning a corner -even as builders continue to content with higher construction costs and supply chain issues.
“With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.”
Building Home at Entry-level Prices Remains Challenging
Huey called on policymakers to “help by reducing the cost of developing lots and building homes via regulatory reform.”
Mortgage Rates Expected to Climb
The average 30-year fixed rate mortgage rate peaked at 7.08% in October, according to Freddie Mac. Although rates declined to approximately 6.1% at the start of February, the 10-year Treasury rate has moved up more than 30 basis points during the past two weeks, indicating an increase for mortgage rates lies ahead.
NAHB Chief Economist Robert Dietz said that forecasts indicate that the housing market has passed peak mortgage rates. The increase in the Housing Market Index is encouraging, Dietz said.
“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” said NAHB Chief Economist Robert Dietz. “And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months.
Dietz added that the NAHB expects a “rebound” back to home construction levels later in 2023 and the beginning of 2024. He said that builders continue to offer a variety of incentives to attract buyers.
Numbers from the Housing Market
31% of builders reduced home prices in February, down from 35% in December and 36% in November.
The average price drop in February was 6%, down from 8% in December, and tied with 6% in November.
57% offered some kind of incentive in February, down from 62% in December and 59% in November.
About the Housing Market Index
Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
All three HMI indices posted gains for the second consecutive month. The HMI index gauging current sales conditions in February rose six points to 46, the component charting sales expectations in the next six months increased 11 points to 48 and the gauge measuring traffic of prospective buyers increased six points to 29.
Looking at the three-month moving averages for regional HMI scores, the Northeast rose four points to 37, the Midwest edged one-point higher to 33, the South increased four points to 40 and the West moved three points higher to 30.
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If the Fed would quit raising rates then builders would likely get a lot more confident. Buyers are skittish when there is a possibility that the interest rate could go up like 1% or more while their home is being built.