Continuous rate pauses from the Fed coupled with cooling mortgage rates have homebuilders feeling more and more positive, according to new data from the National Association of Home Builders (NAHB).

The NAHB/Wells Fargo Housing Market Index (HMI) found that builder confidence grew four points to 48 in February, following the seven-point jump seen in January, marking the third consecutive month of increases.

“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey. “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.”

As their positive outlook on the current market and future grow, builders are beginning to decrease the incentives and discounts they’ve been offering to combat economic challenges:

• Twenty-five percent of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023.
• The average price reduction in February held steady at 6% for the eighth straight month.
• The share of builders offering some form of incentive dropped to 58%, down from 62% in January and the lowest share since last August.

“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,” commented CoreLogic Chief Economist Dr. Selma Hepp. “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.”

All three of the major HMI indices posted gains in February. The HMI index charting current sales conditions increased four points to 52, the component measuring sales expectations in the next six months rose three points to 60, and the component gauging traffic of prospective buyers increased four points to 33.
Looking at the three-month moving averages for regional HMI scores, the Northeast increased three points to 57, the Midwest gained two points to 36, the South rose five points to 46 and the West registered a six-point gain to 38.

“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5% this year,” concluded NAHB Chief Economist Robert Dietz. “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.”

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Claudia Larsen is an associate editor for RISMedia.
 

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