Builder confidence jumps in the new year
Home builder sentiment is up significantly in January as lower mortgage rates bring more buyers back to the market.
Key points:
- The housing market index, which offers a snapshot of builder sentiment each month, increased seven points in January.
- Lower borrowing costs have improved affordability, but many builders still offer incentives to entice buyers.
- Fewer builders are resorting to price cuts in January, however.
Builders are feeling more confident about the housing market heading into the spring buying season.
The housing market index, based on a monthly survey of builders, jumped seven points to 44 in January, according to the National Association of Home Builders. That's the highest level since late summer and on par with sentiment in spring 2023. Last year at this time, the index was just 35.
While sentiment has now increased for two straight months, it remains low compared to recent years. In mid-2020, the index peaked at 90.
Falling mortgage rates, which dropped from nearly 8% in October to 6.61% by the end of year, brought more buyers back to the market, noted NAHB Chair Alicia Huey — and that was a big factor in builders' improved outlook.
Even as affordability has improved slightly, home prices are still rising nationally, putting pressure on buyers. To attract those buyers, some builders are continuing to reduce home prices — but the number of builders offering price cuts has fallen, according to the survey. In January, 31% of builders reported cutting home prices, down from 36% in November and December. The average price reduction in January was 6%, unchanged from the previous month.
Other types of incentives remain popular, however. The survey found that 62% of builders provided a variety of incentives to help make the numbers work for homebuyers, including interest rate buydowns. That percentage has remained fairly consistent since October.
'Positive signs' for new construction in 2024
The most recent census data found that housing starts fell in December, but they were up significantly on an annual basis, rising 7.6% year-over-year.
Despite the monthly decline, economists are bullish about new construction in the new year.
"While monthly housing starts data can oscillate a lot, the general trend we are looking for is an increase in starts, particularly for single-family homes," said CoreLogic Chief Economist Dr. Selma Hepp. She pointed to the increase in building permits last year and an improved housing outlook for 2024 as "positive signs that homebuilders are cautiously optimistic about building new homes."
But will they be deterred by high costs?
"Single-family starts are expected to grow in 2024, adding much needed inventory to the market," Huey said. "However, builders will face growing challenges with building material cost and availability, as well as lot supply."
While cost issues are worth watching, they have eased considerably over the past year. Compared to the surge in prices in 2021 and 2022, overall price growth for building materials "plummeted" in 2023, according to NAHB economist David Logan. Annual price growth for 2023 was just 1.3%, vs. 15% in 2022. And growth has slowed to a trickle in recent months, rising 0.1% in December following a 0.1% increase in November.
Northeast builders feeling most confident
Broken down regionally, the three-month moving averages for the sentiment index put the Northeast well ahead of other areas. The index for the Northeast rose four points to 55, the South increased two points to 41, the Midwest held steady at 34, and the West posted a one-point gain, but sentiment remained the lowest of all regions at 32.
The Northeast has continued to see a monthly uptick in pending home sales, and some data points to high buyer interest in the region and the potential for above-average home price appreciation.