Expectations that mortgage rates will continue to moderate in the coming months, the prospect of future rate cuts by the U.S. Federal Reserve later this year, and a protracted lack of existing inventory helped provide a boost to builder sentiment for the third straight month. Builder confidence in the market for newly built, single-family homes climbed four points to 48 in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index. This is the highest level since August 2023.
All three of the major HMI indices posted gains in February. The HMI index charting current sales conditions increased four points to 52, the component measuring sales expectations in the next six months rose three points to 60, and the component gauging traffic of prospective buyers increased four points to 33.
Key takeaways
- With mortgage rates now below 7% since mid-December, more builders are cutting back on reducing home prices to boost sales.
- In February, 25% of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023.
- The average price reduction in February held steady at 6% for the eighth straight month.
- The use of sales incentives is also diminishing; the share of builders offering some form of incentive dropped to 58% in February, down from 62% in January and the lowest share since last August.
Looking at the three-month moving averages for regional HMI scores, the Northeast increased three points to 57, the Midwest gained two points to 36, the South rose five points to 46 and the West registered a six-point gain to 38.
NAHB's take on the data
“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey. “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.”
“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5% this year,” said NAHB Chief Economist Robert Dietz. “But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. 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.”
