The National Association of Home Builders (NAHB)/Wells Fargo measure of builder confidence shot up in the biggest single-month increase in almost a decade, with home builders anticipating improving housing market conditions in 2023 driven by moderating mortgage rates and affordability gains.
The Housing Market Index, or HMI, rose seven points to 42—still in negative territory, as 50 is defined as a breakeven point for confidence, but a significant step up from late last year, when the HMI sank to levels not seen in a decade.
“With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” said NAHB Chairman Alicia Huey in a statement.
The reading provides another optimistic indicator for real estate in 2023 after RISMedia’s own measurement of broker confidence, the BCI, also saw its largest single-month increase in January.
And although mortgage rates rose slightly last week after several consecutive declines, brokers and builders are seemingly confident that rates will moderate and bring buyers back to the market.
“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” said NAHB Chief Economist Robert Dietz in a statement. “Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle.”
A slightly hotter than expected inflation report this week could complicate things going forward, with neither the HMI nor BCI tracking reaction to that news. In the medium term, however, it seems builders believe that the most disruptive elements of the post-pandemic market may be fading, with hope to address longer-term challenges.
“While we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024,” said Dietz.
By the numbers
Regionally, builders in the Northeast and South have seen the largest increases in confidence—both posting four-point jumps in the HMI’s three-month rolling average to reach 37 and 40, respectively. The West rose three points to 30, while the Midwest posted a modest single-point increase to 33.
Builders are anticipating better sales in the next six months, with the index tracking that metric up 11 points to 48, while the two indices tracking current conditions rose less steeply. Builders’ rating of current sales moved higher by six points to 46, and the gauge tracking traffic of prospective buyers rose six points to 29.
Builders were less likely to offer incentives than in the past, with 57% saying they did so in February compared to 62% in December. There were also fewer builders dropping prices—31% this month compared to 35% in December. The average price drop was 6% of the home price, also down from December, when the average drop was 8%.