A surge in builder confidence marked a positive turn following a four-month decline, propelled by a drop in mortgage rates and promising economic indicators for the housing sector as we approach 2024.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today, builder confidence in the market for newly constructed single-family homes climbed three points to 37 in December.

The recent decrease in mortgage rates by approximately 50 basis points over the past month has rejuvenated builder optimism. Prospective buyers who had previously felt excluded due to pricing are now reevaluating their options, leading to increased traffic, notes NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. Addressing the pressing housing shortage, Huey emphasizes that boosting new home production is a pivotal step to alleviate the affordability crisis, expand housing inventory, and counter inflation.

NAHB Chief Economist Robert Dietz adds that the housing market seems to have navigated the peak mortgage rates for this cycle. This positive development is expected to stimulate home buyer demand in the upcoming months, with the HMI component measuring future sales expectations rising by six points in December.

Dietz acknowledges the recent dip in builder confidence, which contrasts with gains in the pace of single-family permits and starts during the same period. He attributes this temporary discrepancy to dramatic increases in short-term interest rates, impacting land development and builder loans used by private builders. Dietz suggests that as rates moderate, this temporary gap between sentiment and construction activity is likely to diminish.

Despite the positive trend, many builders are still contending with mortgage rates above 7% through November, prompting them to adjust home prices to bolster sales. In December, 36% of builders reported reducing home prices, matching the previous month’s peak for 2023. The average price reduction remained at 6%, unchanged from November. Additionally, 60% of builders offered sales incentives in December, a figure consistent with November but slightly down from 62% in October.

Derived from a monthly survey conducted by NAHB for over 35 years, the NAHB/Wells Fargo HMI assesses builder perceptions of current single-family home sales and sales expectations for the next six months. Scores for each component are used to calculate a seasonally adjusted index, where any number above 50 indicates that more builders view conditions as good than poor.

In December, the HMI index reflecting traffic of prospective buyers rose by three points to 24, the component measuring sales expectations in the next six months increased by six points to 45, and the component charting current sales conditions held steady at 40.

Examining three-month moving averages for regional HMI scores, the Northeast increased by two points to 51, the Midwest declined by one point to 34, the South dropped by three points to 39, and the West posted a four-point decline to 31.

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In a welcome development for prospective homebuyers, US mortgage rates extended their downward trend this week, providing a respite in the face of the most challenging housing market affordability since the 1980s.

According to data released by Freddie Mac on Thursday, the 30-year fixed-rate mortgage rate dipped to an average of 6.67% in the week ending December 21, down from 6.95% the previous week. This marks the eighth consecutive week of declines, with rates falling below 7% for the first time since mid-August. A year ago, the average 30-year fixed-rate stood at 6.27%.

The sustained decline in mortgage rates has been fueled by expectations of Federal Reserve rate cuts in the coming year. The anticipation of these cuts has contributed to a positive trend, with lower rates drawing potential homebuyers back into the market.

Freddie Mac’s Chief Economist, Sam Khater, noted, “Lower rates are bringing potential homebuyers who were previously waiting on the sidelines back into the market.” Additionally, the positive effects are reaching homebuilders, as evidenced by a rise in confidence and an increase in new home construction levels.

The recent surge in rates, which had exceeded 7% in mid-August and peaked at 7.79% in October, seems to have subsided. The consecutive weeks of declining rates indicate a shift away from the highest mortgage rates of this cycle, offering encouraging news for aspiring homebuyers.

The Federal Reserve’s indication of potential rate cuts in 2024 further supports the expectation of continued decline in mortgage rates, as stated by Lisa Sturtevant, Chief Economist at Bright MLS. While the Fed doesn’t directly set borrower interest rates, its actions influence them, with mortgage rates closely tracking the yield on 10-year US Treasuries.

Projections from Bright MLS suggest that the average fixed-rate mortgage rate could fall to 6.5% by mid-year and decrease further to 6.2% by the end of the next year. Lower rates are anticipated to enhance affordability, with potential monthly savings on mortgage payments for homebuyers.

However, despite the positive impact of lower rates on affordability, a significant obstacle persists – a shortage of housing inventory. The lack of available homes continues to keep prices high and rising, affecting the ability of young buyers to enter the market.

Sturtevant highlighted, “Young buyers are having to delay homebuying as it takes them longer to save for a downpayment and they often have to make offers on multiple homes before they are successful. Many first-time homebuyers have been priced out of the market altogether.”

While lower rates are expected to improve affordability, challenges remain. A report from Redfin reveals that just 15.5% of homes for sale in 2023 were affordable for the typical US household, the lowest share on record. This decline is attributed to both a drop in overall listings and the impact of elevated mortgage rates and high home prices.

As the market cautiously adapts to incremental improvements in affordability, it’s acknowledged that the journey back to balance will be gradual. Mortgage rates and home prices, currently above pre-pandemic levels, are projected to remain elevated through the coming year, maintaining pressure on prices as buyer demand increases.

Realtor.com’s Senior Economic Researcher, Hannah Jones, observed, “Though recent data signals a shift towards a more hospitable housing market, the return to balance will be slow.” Despite the challenges, each incremental gain in affordability is seen as a positive step, gradually thawing the market and offering hope to prospective homebuyers.

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