In today’s situation, homebuilders in the US are feeling the pressure of high mortgage rates, causing them to lower home prices in hopes of attracting buyers.
However, there is a glimmer of hope as builders are cautiously looking forward to the possibility of interest rates dropping soon. Despite the challenges, there is a sense of optimism among builders.
In November, the home builder sentiment dropped by six points to reach 34 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).
Although the builder sentiment fell down, now things are looking up. A closer examination of recent macroeconomic data suggests a promising trajectory for home construction in the upcoming months.
Robert Dietz, the Chief Economist at NAHB, noted in his data analysis that despite the dip in the builder sentiment, positive indicators are on the horizon.
Dietz believes that with fewer existing homes available and mortgage rates a bit lower, more people will want homes. It could lead to builders feeling more positive about the market in December.
When the index falls below 50, it is unfavorable. Analysts anticipated the number to stay the same as October, but it turned out differently.
Rising interest rates strain housing market dynamics
Alicia Huey, the NAHB Chair, noted the increase in interest rates since the end of August has negatively affected builder perceptions of market conditions. Many potential buyers found themselves unable to afford homes due to this rise.
Higher short-term interest rates have raised the financing costs for home builders and land developers.
That further hinders the housing supply in a market already facing low resale inventory, she explained in the release.
Optimistic outlook despite builder sentiment dips
For the fourth consecutive month, sentiment has been on a downward trend.
Since July, there has been a significant drop of 22 points, bringing the sentiment to its lowest level since the end of the previous year.
It’s worth noting that the November data was mostly collected before the release of the monthly consumer price index earlier this week, which indicated a moderation in inflation.
Despite the continued decline in builder sentiment in November, there is a positive outlook for home construction in the upcoming months, according to Robert Dietz, the chief economist at NAHB.
He expressed this optimism in the release, citing recent macroeconomic data that indicate improving conditions for the housing market in the near future.
10-Year Treasury Rate Drop Fuels Optimism
The 10-year Treasury rate has recently reached the 4.5% range, a notable shift highlighted by Robert Dietz. It marks the first time since late September.
The expected outcome is a decrease in mortgage rates, possibly approaching or falling below 7.5%.
This dip in mortgage rates comes when there’s already a shortage of homes in the market.
The anticipated result is a boost in housing demand, creating a more optimistic outlook for builders’ views on market conditions in December.
Price cuts surge amidst declining Builder Sentiment
In November, there were significant declines within the index’s three components. Current sales conditions saw a six-point drop, reaching 40. Sales expectations for the next six months decreased by five points to 39.
Additionally, buyer traffic fell by five points, settling at 21. These declines across the components reflect the challenges and shifts in the current dynamics of the housing market.
36% of the builders reported reducing prices compared to the previous two months when it was at 32%.
It marks the highest share in this cycle, equaling the previous peak observed two years ago. The price cuts amounted to 6% on average, reflecting a notable adjustment in response to the current market conditions.
According to the release, the NAHB predicts an approximately 5% rise in single-family starts in 2024. This forecast is based on expectations that financial conditions will improve, supported by positive trends in inflation data in the upcoming months.
The outlook suggests a potential uptick in construction activity for single-family homes in the specified timeframe.
Read More: Mortgage Rate Dip Unlikely to Solve Housing Supply Shortage