Partially spurred by easing mortgage rates, builders displayed cautious optimism for the second month in a row with a seven-point increase in the NAHB/Wells Fargo Housing Market Index (HMI). Despite high construction costs and building material supply chain obstacles, builder confidence for newly built single-family homes in February reached 42, the strongest reading since September 2022.
“With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” says NAHB chairman Alicia Huey. “The nation continues to face a sizable housing shortage that can only be closed by building more affordable, attainable housing. However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall.”
Derived from a monthly survey, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.”
For the second consecutive month, all three HMI indices posted gains. The index gauging current sales conditions in February rose six points to 46, the component charting sales expectations in the next six months increased 11 points to 48, and the gauge measuring traffic of prospective buyers increased six points to 29.
The three-month moving averages for regional HMI scores revealed that the Northeast rose four points to 37, the Midwest edged one point higher to 33, the South increased four points to 40, and the West moved three points higher to 30.
Amid the hopeful optimism, Huey points to the construction of entry-level homes as the most challenging part of the home building market. She calls on policymakers to “help by reducing the cost of developing lots and building homes via regulatory reform.”
According to Freddie Mac, the average 30-year fixed rate mortgage rate peaked at 7.08% in October. While rates declined to approximately 6.1% at the start of February, the 10-year Treasury rate has moved up more than 30 basis points during the past two weeks, indicating an increase for mortgage rates lies ahead, the NAHB reports.
“While the HMI remains below the break-even level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” says 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.
“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, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024.”
Builders continue to offer a variety of incentives to attract buyers during this housing downturn, but recent data indicates that the housing market is showing signs of stabilizing off a cyclical low. NAHB shares:
- 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 6% in November; and
- 57% offered some kind of incentive in February, down from 62% in December and 59% in November.
