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Builder sentiment improves on heels of falling mortgage rates

Publish Date: December 18, 2023

Written by Ben Verde

- Originally published at Inman News - Ben Verde

Builder confidence in the market for single-family homes rose three points to a score of 37 during December, the first monthly improvement since August.

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Decreasing mortgage rates bolstered builder sentiment during December, with homebuilder outlook improving for the first time in four months, according to data released Monday. 

Builder confidence in the market for single-family homes rose three points to a score of 37 during December, according to the National Association of Home Builders — a still overwhelmingly negative score on the index for which any score below 50 is considered negative, but the first monthly improvement seen since August.

The uptick in builder sentiment came as mortgage rates fell 50 basis points during December, landing below 7 percent for the first time in months, and prompting demand for mortgages to pick up.

“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” NAHB Chairman Alicia Huey said in a statement. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory, and lower inflation.”

The NAHB predicted that mortgage rates had peaked and that falling rates would spur further homebuyer demand.

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

Recent pessimism by those in the homebuilding trade has run somewhat counter to the considerable gains made in housing starts in recent months, Dietz noted. Housing starts jumped 7 percent between August and September, for instance, the same period that saw homebuilder sentiment drop to the lowest point in nine months.

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 said. “In turn, higher financing costs for home builders and land developers add another headwind for housing supply in a market low on resale inventory.”

The HMI is derived from a survey of homebuilders that asks them to rate current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor,” along with the traffic of prospective buyers and current sales conditions.

The index gauging prospective buyers in December rose three points, the measure of sales expectations in the next six months increased six points to 45, while the index measuring current sales conditions stayed flat at 40.

Regionally, the Housing Market Index for the Northeast increased two points to 51, while the Midwest fell one point to 34,  the South fell three points to 39, and the West dropped four points to 31.

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