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The numbers: The National Association of Home Builders’ (NAHB) monthly confidence index rose 7 points to 42 in February, the trade group said on Wednesday.
This is the second month in a row that sentiment has improved among builders.
The jump in confidence in February was more than what analysts had expected. Economists polled by The Wall Street Journal expected the index to rise to 37.
The February reading of 42 was the strongest since September 2022, the NAHB said.
The last time builder sentiment rose by this magnitude was in June 2013.
A drop in mortgage rates boosted sentiment, despite builders continuing to deal with high construction costs and supply chain delays. The bump in confidence signals that “the housing market may be turning a corner,” the NAHB said.
A year ago, the index stood at 81.
Key details: All three gauges that underpin the overall builder-confidence index rose for the second month in a row.
- The gauge that marks current sales conditions rose by 6 points.
- The component that assesses sales expectations for the next six months rose by 11 points.
- And the gauge that measures traffic of prospective buyers rose by 6 points.
Builders in all four regions reported an increase in confidence, the NAHB said, led by the Northeast and South, where the index moved up 4 points, followed by the West and Midwest.
Builders were also slowing down on offering incentives to lure buyers as rates come down. Per NAHB, only 31% of builders dropped home prices in February, as compared to 35% in December and 36% in November.
Big picture: Builders are thrilled that mortgage rates are dropping and at the possibility that buyers are coming back, as seen by their expectation for sales to improve.
But mortgage rates are still volatile. Rates rose in the latest week, as rising inflation prompted the market to expect further rate hikes from the U.S. Federal Reserve.
What the NAHB said: “Forecasts indicate that the housing market has passed peak mortgage rates for this cycle,” Robert Dietz, chief economist at the NAHB, said in a statement.
“And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months,” Dietz added, “followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024.”
Builders also expressed concern about affordability. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing,” Alicia Huey, chairman of the NAHB and a home builder and developer from Birmingham, Ala., said in a statement.
Huey added that building entry-level homes was the most “challenging part” of the market, and called on lawmakers to help reduce the cost of developing lots and building homes “via regulatory reform.”
What are they saying? “The NAHB Home Sales Index showed further signs of stabilization in February as mortgage rates came down further during the month,” Eugenio J. Alemán, chief economist at Raymond James, wrote in a note.
“However, this situation may be reversed in the coming months as we expect mortgage rates to increase once again due to the Fed’s active interest rate campaign,” he added.
Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose above 3.79% on Wednesday morning.
Both the SPDR S&P Homebuilders ETF (
XHB,
) and home builder stocks like
DHI,
TOL,
and
KBH,
were all trading lower.
