Builder Sentiment Increases for the Third Month in a Row

Positive Signs for New Home Market: Builder confidence in the market for newly built single-family homes climbed four points to 48 in February, marking the highest level since August 2023, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

This upward trend reflects several factors, including:

• Moderating Mortgage Rates: Expectations of continued decline in mortgage rates throughout the year buoyed sentiment. While rates remain high for some buyers, even small decreases generate significant positive responses.
• Prospective Rate Cuts: The prospect of the Federal Reserve lowering rates later in 2024 further fueled optimism.
• Pent-Up Demand: A lack of existing inventory, combined with pent-up demand from potential buyers, is expected to fuel market activity if rates continue to decline.

NAHB Forecasts and Challenges: NAHB forecasts a 5% increase in single-family starts this year due to anticipated Fed rate cuts. However, builders face potential challenges:

• Lot Availability: With increased construction, lot availability is expected to become a growing concern.
• Labor Shortages: Persistent labor shortages remain a hurdle for the industry.
• Interest Rate & Cost Sensitivity: The volatile 10-year Treasury rate, up over 40 basis points since January, serves as a reminder that the recovery will be uneven, with buyers sensitive to interest rate and construction cost fluctuations.

Shifting Sales Strategies: With mortgage rates dropping below 7% since mid-December, fewer builders are resorting to price reductions to drive sales.

In February, 25% reported price cuts, down from 36% in December. However, the average price reduction remains steady at 6% for the eighth month. Additionally, the use of sales incentives has decreased, reaching its lowest level since August 2023.

HMI Details: The NAHB/Wells Fargo HMI, derived from a 35-year-old monthly survey, gauges builder perceptions of current and future single-family home sales and buyer traffic.

Scores above 50 indicate more builders view conditions as good than poor. All three major HMI indices rose in February:

• Current sales conditions: +4 points to 52
• Sales expectations for next six months: +3 points to 60
• Traffic of prospective buyers: +4 points to 33

Regional Trends: Three-month moving averages for regional HMI scores show gains across the board:

• Northeast: +3 points to 57
• Midwest: +2 points to 36
• South: +5 points to 46
• West: +6 points to 38

While challenges remain, the upward trend in builder sentiment suggests growing optimism in the new home market, driven by expectations of moderating mortgage rates and pent-up demand.

(Read more on Eyeonhousing.org)