Renewed optimism in housing market with increased single-family home builds
Builder confidence in the newly built single-family homes market has surged, driven by mortgage rates falling below 7% in the past month.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for January revealed a seven-point jump to 44, marking the second consecutive monthly increase aligned with declining interest rates.
“Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” said NAHB chairman Alicia Huey. “Single-family starts are expected to grow in 2024, adding much-needed inventory to the market. However, builders will face growing challenges with building material cost and availability, as well as lot supply.”
Housing starts in December came in at a seasonally adjusted annual rate of 1.46 million, above consensus expectations of 1.43 million. Single-family housing starts (1.03 million) were 16% higher than a year ago, and permits for single-family homes reached their highest level since May 2022.
Homebuilders are expressing greater optimism for two reasons: the anticipation of lower mortgage rates throughout 2024 and a persistent gap between housing starts and demand, ensuring tight market conditions, explained CoreLogic chief economist Selma Hepp.
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Despite the drop in mortgage rates, many builders continue to reduce home prices to stimulate sales. In January, about 31% of builders reported price cuts, a decrease from the 36% in previous months and the lowest since August, with an average reduction of 6%. Additionally, 62% of builders have been offering various sales incentives since October.
January’s HMI indices all registered improvements: current sales conditions rose by seven points to 48, sales expectations over the next six months surged by 12 points to 57, and the metric for prospective buyer traffic increased by five points to 29.
“Mortgage rates have decreased by more than 110 basis points since late October per Freddie Mac, lifting the future sales expectation component in the HMI into positive territory for the first time since August,” said Robert Dietz, NAHB’s chief economist. “As home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots and labor.”
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