Builder confidence is at its highest level since August

Homebuilder confidence shot up for the third straight month in February as builders await future rate cuts by the Federal Reserve.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) climbed four points to 48 in February, its highest level since August 2023. 

The HMI is a monthly survey that gauges NAHB members’ perceptions of newly built single-family home sales, expected sales for the next six months and potential homebuyer traffic. An index of 50 is neutral. Anything higher than 50 indicates that builders view conditions as favorable, while readings lower than 50 indicate that builders view conditions as unfavorable.

“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama, said in a statement. 

“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.”

Meanwhile, NAHB is forecasting that single-family starts will rise about 5% in 2024.

“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,” Selma Hepp, chief economist at CoreLogic, said in a statement.

But as builders ramp up their activity, lot availability and labor shortages are expected to be growing concerns, NAHB chief economist Robert Dietz said. 

“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,” Dietz said.

More builders are removing price cuts 

In February, 25% of builders reported applying price cuts, down from 31% in January and 36% in the last two months of 2023. But the average price reduction in February stayed put at 6% for the eighth straight month. 

Meanwhile, the use of sales incentives also decreased, with 58% of builders offering some form of incentive in February, down from 62% in January. It was the lowest share since August.

Additionally, the NAHB reported that all three major HMI indices posted increases in February. Homebuilders’ gauge of current sales conditions rose to 52. The gauge measuring the traffic of prospective buyers increased to 33. And the component charting sales expectations over the next six months inched up to 66. 

The three-month moving averages for the HMI increased across each of the four major regions. The reading in the Northeast rose 3 points to 57, the Midwest gained 2 points to 36, the South increased 5 points to 46 and the West posted a 6-point increase to 38.