Builders cheer up as mortgage rates fall

A decline in mortgage rates since November helped end four months of declines in builder confidence. Recent economic readings suggest improving housing conditions in 2024. 

Builder confidence gained three points to 37 in December, the first monthly increase since July, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). 

The HMI index gauges NAHB members’ perception of current single-family home sales, expected sales for the upcoming six months and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that homebuilders view conditions as favorable; and lower than 50 indicates that builders view conditions as unfavorable.

“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” NAHB Chairman Alicia Huey, a custom homebuilder and developer from Birmingham, Ala, said in a statement. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”

According to NAHB Chief Economist Robert Dietz, the peak in mortgage rates for this cycle is behind us, which should help “to spur buyer demand in the coming months.”

However, land development and borrowing costs will remain significant headwinds for private builders.

“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,” Dietz said.  

Homebuilders continued to make concessions to boost their sales

Builders continued to provide sales incentives of all forms in December as mortgage rates were still above 7% throughout November, per Freddie Mac data. In December, 36% of builders reported cutting home prices, just like in November. The average price reduction in December remained at 6%, unchanged from the previous month. 

Homebuilders’ gauge of current sales conditions held steady at 40. The gauge measuring the traffic of prospective buyers rose three points to 24. The component charting sales expectations over the next six months increased 6 points to 45. 

The three-month moving averages for HMI were uneven across the four major regions in December. 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.