Mortgage rates dipping below 7% in the last month triggered a significant surge in builder confidence at the onset of the new year. According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly built single-family homes experienced a noteworthy climb, reaching 44 points in January. This seven-point increase marks the second consecutive monthly rise and closely aligns with the period of declining interest rates.
Impact of Lower Interest Rates
NAHB Chairman, Alicia Huey, a custom home builder and developer, attributes this boost in confidence to the improved affordability conditions resulting from lower interest rates in the past month. The reduced rates have enticed buyers back into the market, countering the dip in activity witnessed during the fall due to higher borrowing costs.
Huey anticipates a growth in single-family starts in 2024, contributing much-needed inventory to the market. However, she acknowledges that builders will face challenges, including building material cost and availability, along with lot supply.
Future Sales Expectations and Supply-Side Challenges
NAHB Chief Economist, Robert Dietz, highlights the substantial decrease of more than 110 basis points in mortgage rates since late October, as reported by Freddie Mac.
This has lifted the future sales expectation component in the HMI into positive territory for the first time since August. As home building expands in 2024, Dietz foresees growing challenges on the supply side, manifesting as higher prices and/or shortages of lumber, lots, and labor.
Builder Strategies Amidst Falling Rates
Despite mortgage rates falling below 7% in the past month, many builders are persisting with price adjustments to stimulate sales. In January, 31% of builders reported cutting home prices, reflecting a decline from the previous two months and the lowest rate since last August. The average price reduction in January remained at 6%, unchanged from the previous month. Concurrently, 62% of builders offered various sales incentives in January, maintaining a stable trend observed since October.
Insights from the HMI Indices
Derived from a monthly survey conducted by NAHB for more than 35 years, the NAHB/Wells Fargo HMI assesses builder perceptions of current single-family home sales and sales expectations for the next six months. The indices charting current sales conditions, sales expectations, and traffic of prospective buyers all posted gains in January, indicating an optimistic outlook. The three-month moving averages for regional HMI scores also show positive trends across different regions.
Regional Variances in HMI Scores
Examining the three-month moving averages, the Northeast witnessed a four-point increase to 55, the South experienced a two-point rise to 41, the West registered a one-point gain to 32, and the Midwest held steady at 34. These variations showcase regional differences in builder sentiment, reflecting the diverse conditions across the country.
Overall, the surge in builder sentiment in January, fueled by falling interest rates, signals positive momentum in the housing market. However, challenges on the supply side, including material costs and availability, loom on the horizon. Builders' strategic responses to lower rates, such as price adjustments and sales incentives, indicate a dynamic market. As the year progresses, keeping a close eye on regional variances will be crucial in understanding the nuanced landscape of the housing market.