Interest Rate Pause Raises Builder Sentiment

Falling mortgage rates helped end a four-month decline in builder confidence, and recent economic data signal improving housing conditions heading into 2024.

Builder confidence in the market for newly built single-family homes rose three points to 37 in December, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic. The housing market appears to have passed peak mortgage rates for this cycle, and this should help to spur home buyer demand in the coming months, with the HMI component measuring future sales expectations up six points in December.

It is worth noting that single-family builder sentiment has separated somewhat from recent starts/permits data. Our statistical analysis indicates that temporary and outsized differences between builder sentiment and starts occur after short-term interest rates rise dramatically, increasing the cost of land development and builder loans used by private builders. In turn, higher financing costs for home builders and land developers add another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market. Looking forward, as rates moderate, this temporary difference between sentiment and construction activity will decline.

But with mortgage rates still running above 7% throughout November, per Freddie Mac data, many builders continue to reduce home prices to boost sales. In December, 36% of builders reported cutting home prices, tying the previous month’s high point for 2023. The average price reduction in December remained at 6%, unchanged from the previous month. Meanwhile, 60% of builders provided sales incentives of all forms in December, the same as November but down slightly from 62% in October.

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.

The HMI index gauging traffic of prospective buyers in December rose three points 24, the component measuring sales expectations in the next six months increased six points to 45 and the component charting current sales condition held steady at 40.

Looking at the three-month moving averages for regional HMI scores, the Northeast increased two points to 51, the Midwest fell one point to 34, the South dropped three points to 39 and the West posted a four-point decline to 31.

The HMI tables can be found at nahb.org/hmi.