Is the Housing Market Recovering? Here’s Why Home Builders Feel ‘Cautious Optimism.’

Article originally posted on USA Today on February 20, 2023

After every month in 2022 recorded a decline in builder confidence, could 2023 herald a change?

It’s beginning to look that way.

Builder confidence in the market for newly built single-family homes in February rose seven points to 42, marking a second consecutive monthly gain, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. This is the strongest reading since September of last year.

High mortgage rates, elevated construction costs running well above the inflation rate and flagging consumer demand due to deteriorating affordability conditions had dragged builder sentiment down every month in 2022, according to the association.

But as interest rates began inching down in January, builders seem to be getting more confident.

With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains in affordability has the ability to bring more buyers to the market, said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama.

A construction worker reviews a sheet in front of a property under construction.

“The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing. However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall,” she said.

Noting that the most challenging part of the home building market remains construction of entry-level homes, Huey called on policymakers to “help by reducing the cost of developing lots and building homes via regulatory reform.”

The average 30-year fixed rate mortgage rate peaked at 7.08% in October, according to Freddie Mac. Rates declined to approximately 6.1% at the start of February.

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“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. “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.”

While ongoing volatility for mortgage rates and housing costs are expected, the building market should be able to achieve stability in the coming months, added Dietz.

Although builders continue to offer a variety of incentives to attract buyers during this housing downturn, recent data indicate that the housing market is showing signs of stabilizing off a cyclical low:

  • 31% of builders reduced home prices in February, down from 35% in December and 36% in November.
  • The average price drop in February was 6%, down from 8% in December, and tied with 6% in November.
  • 57% offered some kind of incentive in February, down from 62% in December and 59% in November.

What Does Home Builder Sentiment Mean?

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

All three HMI indices posted gains for the second consecutive month. The HMI index gauging current sales conditions in February rose six points to 46, the component charting sales expectations in the next six months increased 11 points to 48 and the gauge measuring traffic of prospective buyers increased six points to 29.

What was The Regional Outlook for Builders?

Looking at the three-month moving averages for regional HMI scores, the Northeast rose four points to 37, the Midwest edged one-point higher to 33, the South increased four points to 40 and the West moved three points higher to 30.