Homebuilder sentiment finally perks up as mortgage rates drop

After a year of declines, homebuilder sentiment started off 2023 with a modest uptick, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report, released Wednesday. It suggests homebuilder sentiment has bottomed out and (slightly) better days are ahead for homebuilders.

In January, builder confidence in the market for newly build single-family homes rose four points from December’s reading, to an index value of 35.

The NAHB/HMI report is based on a monthly survey of NAHB members, in which respondents are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the homebuilder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.

The NAHB attributes the increase to the slight decrease in mortgage rates at the end of last year.

“The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023,” Jerry Konter, the NAHB Chairman, said in a statement.

The trade organization’s chief economist is also optimistic.

“While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead,” Robert Dietz, the trade group’s chief economist, said in a statement. “In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability. Improved housing affordability will increase housing demand, as the nation grapples with a structural housing deficit of 1.5 million units.”

Three other indices monitored by the NAHB also posted gains in January. The gauge measuring current sales conditions rose to 40, up four points month over month. The component analyzing sales expectations for the next six months rose two points to a reading of 37 and the index that charts traffic of prospective buyers rose three points from December to a reading of 23.

Regionally, the three-month moving averages for HMI scores posted mixed results, with the West gaining one point to a reading of 27, the South holding steady at 36, and the Northeast and the Midwest dropping modestly to 33 and 32, respectively.

Another survey, the BTIG/HomeSphere State of the Industry Report, also reported a leveling in homebuilder outlook. According to the survey, 71% of builders saw an annual decrease in sales last month, the same as in November. Despite a 70% annual decrease in traffic, the builder reported a slight improvement in performance relative to expectations with 11% of respondents reporting that sales were better than expected and 35% reporting that sales were worse than expected. These metrics are improved from 10% and 50%, respectively in November.

“Conditions continue to be very slow given higher mortgage rates, fear of falling real estate values ​​and weak confidence among consumers,” Carl Reichardt, a BTIG analyst, said in a statement.

The BTIG/HomeSphere study is a survey of approximately 50-100 small- to mid-sized homebuilders that sell, on average, 50-100 homes per year throughout the nation. In December the survey had 91 respondents.

Despite the more positive outlook, homebuilders are still cutting prices and using incentives to sell homes, with 29% of survey respondents reporting they cut some, most or all base prices and 41% reported using incentives.

“It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” Konter said.

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