Falling Interest Rates Buoy Builder Sentiment

The combination of a drop in mortgage rates with recent economic data signaling housing conditions will improve in 2024 has helped to end a four-month run of low builder confidence, according to a news release from the National Association of Home Builders (NAHB).

Builder confidence in the market for newly built single-family homes rose three points to 37 in December, according to the latest NAHB/Wells Fargo Housing Market Index (HMI) released on Dec. 18. The HMI is a weighted average of three separate component indices: present single-family sales, single-family sales for the next six months, and traffic of prospective buyers; any number over 50 indicates more builders view conditions as good than poor. 

“The housing market appears to have passed peak mortgage rates for this cycle, and this should help to spur home buyer demand in the coming months, with the HMI component measuring future sales expectations up six points in December,” said NAHB Chief Economist Robert Dietz.

Dietz added that the recent pessimism in builder confidence this fall has been somewhat counter to gains for the pace of single-family permits and starts during this time frame.

“Our statistical analysis indicates that temporary and outsized differences between builder sentiment and starts occur after short-term interest rates rise dramatically, increasing the cost of land development and builder loans used by private builders,” Dietz noted. “In turn, higher financing costs for home builders and land developers add another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market. Looking forward, as rates moderate, this temporary difference between sentiment and construction activity will decline.”

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