Easing mortgage rates help lift builder confidence

Home builder sentiment increased for the second consecutive month, the NAHB reports.
Housing starts permits home builder
Builder confidence increased 7 points in February, according to the latest NAHB/Wells Fargo Housing Market Index.

Residential construction optimism appears to be back on the rise—cautiously.

Home builder confidence in the market for newly-built single-family homes increased 7 points to 42, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Index (HMI), releases this morning.

The NAHB said the second straight month of gains in builder confidence is being fueled by a decrease in mortgage rates. 

“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. 

But Huey added that the nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.

“However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall,” Huey said.

National Association of Home Builders Chair Alicia Huey
National Association of Home Builders Chair Alicia Huey.

Although the latest HMI is optimistic, the NAHB points out that builders continue to battle high construction costs and supply chain issues when it comes to materials.

The association also said the most challenging part of the home building market remains the construction of more affordable entry-level homes.

Huey said the NAHB is calling on policymakers to “help by reducing the cost of developing lots and building homes via regulatory reform.”

Last week, NAHB leadership met with Congress to discuss why housing affordability has remained problematic. 

As the average 30-year fixed rate mortgage rate peaked at 7.08% in October 2022, according to Freddie Mac, rates declined to approximately 6.1% at the start of February 2023. But the 10-year Treasury rate has moved up more than 30 basis points during the past two weeks, indicating another increase for mortgage rates lies ahead, the NAHB 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. “Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle. 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, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024.”

Additional data provided by the NAHB indicates that builders continue to offer a variety of incentives to attract buyers during the housing downturn. 

Here are a few of the indicators the NAHB reported that show signs of housing stabilizing off a cyclical low:

  • 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.

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.

HMI tables can be found at nahb.or/hmi.

Home builders surveyed by BTIG said a decrease in mortgage rates had a postive impact on sales and traffic. Click to enlarge.

The January monthly HomeSphere/BTIG survey, also released this morning, reveals more signs of improvement. 

The survey found that 54% of builders reported year-over-year (YOY) decreases in salesvs. 71% in Dec. 2022 and 41% compared to January 2021. 

Builders reported a slight improvement in performance relative to expectations (21% of sales as better than expected vs. 11% last month and 38% of sales as worse than expected vs. 35% last month), indicating that builders are re-adjusting their business plans and lowering their expectations.

This month, BTIG asked a special question regarding the impact of lowering interest rates with 80% of builders surveyed saying that lower rates have positively impacted business.

highlights from the monthly Homesphere/BTIG January builder survey include: 

  • Sales and traffic trends are still soft YOY but picking up sequentially: 13% of builders reported higher YOY sales vs. 7% in January and 54% saw a YOY decrease in orders vs. 71% last month and 26% in January 2022. 13% reported an increase in YOY traffic vs. 10% last month. 53% saw a decline, compared to 70% last month.
  • Sales and traffic relative to expectations remain weak, but the better-minus-worse ratio is improving: 21% of respondents saw sales as better than expected vs. 11% last month, while 38% saw sales as worse than expected, vs. 34% last month. Traffic was up slightly - 19% saw better-than-expected traffic, with 29% reporting worse-than-expected traffic (compared to 15% and 35%, respectively, last month). 
  • Builders continue to cut base prices and use incentives: The number of builders raising prices was relatively consistent - 17% of builders raised some, most, or all base prices in January, from 19% last month. 31% cut some, most or all base prices vs. 29% last month. Incentive use declined but remained elevated as 30% of builders reported increasing some, most or all incentives vs. 39% last month. 
  • Recent decline in mortgage rates has helped: 80% of builders surveyed believe lower rates over the last three months have positively impacted business, with 30% saying the decline has helped moderately or significantly. 

The latest Monthy New Residential Construction report for January 2022, featuring the most recent housing starts and permits data, will be released tomorrow by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

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