In a positive turn of events, homebuilder confidence experienced a noteworthy improvement in December, according to the National Association of Home Builders/Wells Fargo Housing Market Index released on Monday. This resurgence in confidence comes as mortgage rates continued to decline, offering a glimmer of optimism for the housing market in 2024.
For the first time in four months, builder confidence in the market for newly built single-family homes rose, reaching a score of 37 on the index. The boost in confidence is attributed to the combination of lower mortgage rates and improved economic data, fostering a sense of positivity among builders as they enter the new year.
The monthly index examines various factors, including current sales, buyer traffic, and the outlook for sales of new-construction homes over the next six months. Builder sentiment began to decline in August, and by September, the index had fallen below the break-even measure of 50, remaining there since.
Robert Dietz, Chief Economist at NAHB, noted, “The housing market appears to have passed peak mortgage rates for this cycle, and this should help to spur homebuyer demand in the coming months, with the HMI component measuring future sales expectations up six points in December.”
Despite the fall in builder confidence in recent months, there have been notable gains in the pace of single-family building permits and new construction housing starts. Dietz explained that a temporary and outsized gap between builder sentiment and housing starts can occur after interest rates rise dramatically, leading to increased costs for builders in areas such as land development and builder loans.
Dietz emphasized the need for state and local policymakers to alleviate regulatory burdens on the cost of land development and homebuilding, especially in a market where higher financing costs add to the challenges of housing supply.
“Looking forward, as rates moderate, this temporary difference between sentiment and construction activity will decline,” Dietz expressed.
Even during the typically slow season for the housing market, the index revealed positive trends. The traffic of prospective buyers looking at new homes rose by three points to 27. Sales expectations for the next six months increased by six points to 45, and the component measuring current sales conditions held steady at 40.
Alicia Huey, NAHB Chairman, highlighted the impact of lower mortgage rates, stating, “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.”
In the face of a considerable housing shortage, the consensus among industry leaders is that boosting new home production is crucial for easing the affordability crisis, expanding housing inventory, and mitigating inflation. As the Federal Reserve addresses inflation concerns, the collaboration of policymakers at various levels could play a pivotal role in shaping a more sustainable and attainable housing supply for the market.