Housing Market Insights from Builders and Lenders

As 2024 progresses, both homebuilders and mortgage lenders are grappling with the challenging economic conditions characterized by high interest rates and affordability issues. The August results from the NAHB/Wells Fargo Housing Market Index (HMI) and Fannie Mae’s Mortgage Lender Sentiment Survey (MLSS) reveal a landscape where confidence is shaky, yet there are glimmers of optimism.

Declining Confidence Among Builders

Builder confidence in the market for new single-family homes dropped to 39 in August, a decline of two points from the downwardly revised July reading of 41. This marks the lowest confidence level since December 2023. The ongoing decline is driven by affordability challenges and buyer hesitation resulting from elevated interest rates and high home prices.

All three components of the Housing Market Index (HMI) remained below the critical threshold of 50 in August:

• Present sales conditions decreased by two points to 44.
• Expected sales over the next six months rose by one point to 49.
• Traffic of prospective buyers fell by two points to 25.

The August survey also highlighted a growing trend of builders cutting prices to boost sales, with 33% of builders doing so in August, up from 31% in July and 29% in June. Despite this, the average price reduction remained consistent at 6% for the 14th consecutive month.

NAHB/Wells Fargo Housing Market Index (HMI) | NAHB

Mortgage Lenders’ Strategic Shifts

The most recent Fannie Mae Mortgage Lender Sentiment Survey shows lenders are also feeling the strain of the current economic climate; however, they are meaningfully more optimistic overall even though a sizable minority remains pessimistic. Fewer lenders anticipate a recession in the next two years than did one year ago, and nearly 60% expect a refinance boom in 2025. Lenders seem eager to conserve critical resources, specifically personnel, by engaging in short-term cost-cutting, so they can be well-positioned to take advantage of this boom. According to the latest MLSS, “talent management and leadership” and “cost-cutting” have emerged as the top priorities for 2024—followed by “process streamlining.” All three goals align with a desire to survive in the short run and to be prepared to take advantage of pent-up demand when rate cuts come.  The industry has experienced considerable workforce downsizing, with nearly two-thirds of lenders reporting job cuts in 2023. Lenders believe further cutting could harm their ability to do business when rates drop. In fact, a slight majority of lenders expect to maintain or even increase their workforce in 2024.  

Mortgage Lenders Cite Talent Management and Cost-Cutting as Top Priorities | Fannie Mae

Comparing the Lender and Builder Outlooks: Perhaps Not As Different As They Appear

Both builders and lenders are navigating a complex environment where high costs, low affordability, and economic uncertainty regarding rate cuts dominate. Builders are focused on adjusting pricing strategies and increasing incentives to attract buyers while a majority of lenders are honing in on managing costs and maintaining talent as they prepare for improved market conditions. Nevertheless, many lenders remain stuck in the cost-cutting mode of 2023. Of course, an expected refinance boom partly explains why lenders are more optimistic than builders. After all, builders do not benefit from increased loan volume. That said, the expected refinance boom does not completely explain the difference.

The greater pessimism inherent in the builder survey might also be due to its more limited time horizon—namely its focus on the next six months rather than on the next year or two. While there was an uptick in expected sales over the next six months, it is possible builders and lenders both expect the true recovery to occur in 2025 once several rate cuts have happened. In short, we might see a new kind of effect where buyers hold off on buying despite rate-cuts because they anticipate further rate cuts to follow. We could see the locked-in effect joined by a waiting effect: The locked-in effect coming  from people who don’t want to give up on their existing, low-rate mortgage and the waiting effect coming from those who could benefit from refinancing or buying immediately but are anticipating more cuts. 

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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 August 23, 2024