Homebuilders start the year on a positive note

For the second consecutive month, homebuilders have become more optimistic. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report rose seven points month-over-month to a reading of 44 in January.

The report attributes this sharp increase in builder confidence to mortgage rates remaining under 7% for the past month.

“Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” Alicia Huey, the chairman of the NAHB, said in a statement. “Single-family starts are expected to grow in 2024, adding much needed inventory to the market.”

The NAHB/HMI report is based on a monthly survey of NAHB members (typically regional and smaller homebuilders), in which homebuilders are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the homebuilder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.

Despite the increase in confidence and the lower mortgage rates, homebuilders still reported price cuts and other incentives. According to the report, 31% of builders reported cutting prices in January, with an average price reduction of 6%. Although the size of the price reduction remained steady month-over-month, the share of builders cutting prices dropped from 36% in December 2023. Overall, 62% of builders reported providing sales incentives. This metric has remained between 60% and 62% since Oct. 2023.

The NAHB reported also that homebuilders’ gauge of current sales conditions rose seven points to 48. The gauge measuring traffic of prospective buyers increased five points to 29, while the component charting sales expectations over the next six months posted a 12-point jump to 57.

Despite their optimism, industry experts believe builders will still face many challenges this year.

“As home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots and labor,” Robert Dietz, the chief economist of the NAHB, said in a statement.

Regionally, the three-month moving averages for HMI rose in three of the four regions, with the West gaining one point to a reading of 32, the South increasing two points to 41, and the Northeast rising four points to 55. The Midwest held steady from the previous month at a reading of 34.