Home builder confidence jumped this month by the largest amount in almost 10 years, as falling mortgage rates pulled in more buyers.
That’s according to a February report from the National Association of Home Builders that looks at current sales, buyer traffic and the outlook for sales of new construction homes over the next six months.
All three metrics rose in February for the second straight month, showing the strongest reading since September and the largest monthly increase for builder sentiment since June 2013.
After taking a positive turn in January for the first time in a year, experts were looking for home building to pivot as construction prospects improve and inflation cooled. This is good news for home buyers who have been facing low inventory amid a decades-long national shortfall in building.
But builders continue to face headwinds with high construction costs and building material supply chain logjams, the report said.
Mortgage rates may have peaked, but there’s volatility on the horizon
New economic data — namely a stronger-than-expected jobs report for January and a Consumer Price Index report this week that showed inflation easing only slightly — has investors, economists and housing experts concerned about continued mortgage rate volatility.
Although the index remains below the breakeven level of 50, the increases between December and February are a positive sign for the market, said NAHB chief economist Robert Dietz.
“Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle,” he said.
“And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months,” Dietz added, “followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024.”
While builders continue to offer a variety of incentives to attract buyers during this housing downturn, recent data indicates that the housing market is showing signs of stabilizing off a cyclical low, according to Dietz. For example, 31% of builders reduced home prices in February, down from 35% in December and 36% in November.
The average price drop in February was 6% — down from 8% in December, and tied with November’s reading. More than half of builders, or 57%, offered some kind of incentive in February, down from 62% in December and 59% in November.
But mortgage rates that are lower now than they were last fall are improving affordability for buyers.
The average mortgage rate for a 30-year, fixed-rate mortgage rate peaked last year at 7.08% in November, according to Freddie Mac. Although rates declined to about 6.1% at the start of February, the 10-year Treasury rate has moved up in recent weeks on inflation concerns, suggesting rates are likely to climb up again.
“With the largest monthly increase for builder sentiment since June 2013, the [report] indicates that incremental gains for housing affordability have the ability to price in buyers to the market,” said Alicia Huey, NAHB chairman. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.”
However, she said, the most challenging part of the home building market remains construction of entry-level homes. Huey called on policymakers to “help by reducing the cost of developing lots and building homes via regulatory reform.”