Surging Optimism: Home Builder Sentiment Climbs

The National Association of Home Builders (NAHB) recently announced a notable improvement in home builder sentiment; their housing market index (HMI) reached 44 this month up from 37 in December. While any number below 50 indicates an unfavorable outlook, homebuilder sentiment appears to follow an upward trend.

The recent decline in mortgage rates, which fell below 7% in the past month, explains this improvement. Indeed, the index has shown consistent improvement as rates have fallen in the last few months. The December HMI also showed improvement over November’s numbers.

About lower interest rates

In the NAHB’s latest report, Alicia Huey, NAHB Chairman and a custom home builder from Birmingham, Ala., emphasized that lower interest rates have enhanced housing affordability, enticing buyers who were previously deterred by higher borrowing costs. The expectation is for single-family starts to grow in 2024, contributing much-needed inventory to the market. However, builders do anticipate challenges around building material costs, availability, lot supply, and labor costs.

That said, despite builders’ stated apprehensions, Jones Lang LaSalle estimates construction costs will rise between 2% and 4% throughout 2024, which is in line with general inflationary expectations. Labor costs are expected to continue tightening, but supply chain issues should moderate though geopolitical tensions might cause shortages of electrical and other finished goods.

Read more: The Complexities of Real Estate Economics

What about housing starts?

Housing starts are also up: Despite a downgraded estimate in November for seasonally adjusted housing starts over the past twelve months from 1.56 million to 1.525 million, the numbers are still much better than what analysts expected. Furthermore, while December saw its regular holiday season drop, December starts exceeded the pace of the previous December by 7.5 percent. Nothing speaks louder than action, and this housing start information provides further support for the NAHB index.

Despite falling mortgage rates, many builders are still lowering home prices to stimulate sales though the percentage doing so has declined. In January, 31% of builders reported price reductions, a decrease from the previous two months and the lowest rate since last August. The average price reduction remained 6%, consistent with the previous month. Additionally, 62% of builders offered sales incentives in January, a percentage that has remained stable since October.

Read more: Housing market insights from builders

According to the indices

In terms of HMI indices, all three major components experienced gains in January. The index measuring current sales conditions increased seven points to 48, the component gauging sales expectations in the next six months jumped 12 points to 57, and the index tracking traffic of prospective buyers rose five points to 29. The fact that all three components have increased leads me to believe that the index will be over 50 by the end of this year.

The regional picture further supports the improved optimism (or rather decreased pessimism). Analyzing the three-month moving averages for regional HMI scores, the Northeast saw a one-point increase to 56, the South increased by ten points to 49, the West registered a nine-point gain at 38, and the Midwest held steady at 35. The fact that the regional HMIs are all pointing upward provides further support for the idea that interest rates are the explanation since interest rate movements are a byproduct of monetary policy and, therefore, move in the same direction no matter what your region. 

Read more: Exploring Cures for the Housing Affordability Crisis

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published January 24, 2024