Housing market update | Homebuilder sentiment surges as mortgage rates trend down

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Homebuilder confidence surged in January as mortgage rates continued to trend lower, according to the National Association of Home Builders/Wells Fargo Housing Market Index released Wednesday.

Builder confidence in the market for newly built single-family homes surpassed market expectations, climbing seven points to 44 on the index. The optimism comes as mortgage rates begin to fall and data points to an improving economy heading into 2024.

This marks the second consecutive monthly increase in builder confidence.

Lower interest rates have improved housing affordability and brought some buyers back into the market after being sidelined by higher borrowing costs, said Alicia Huey, NAHB Chairman.

“Single-family starts are expected to grow in 2024, adding much needed inventory to the market,” Huey said. “However, builders will face growing challenges with building material cost and availability, as well as lot supply.”

While mortgage rates have climbed slightly over the past couple of weeks, the average rate for a 30-year fixed-rate loan is more than a full percentage point lower than last year’s high of 7.79% seen at the end of October. The average rate is currently hovering around 6.6%, according to Freddie Mac.

The monthly builder index looks at current sales, buyer traffic and the outlook for sales of new-construction homes over the next six months.

Builders still cutting prices to boost sales

For would-be homebuyers, mortgage rates falling is good news. So are the incentives that home builders are still offering in order to boost sales.

Even as mortgage rates have dropped, many builders continue to reduce home prices, according to the report.

However there has been a slight drop in the number of homebuilders offering reductions in price.

In January, 31% of builders reported cutting home prices, down from 36% during the previous two months. The typical price reduction in January was 6%, which was unchanged from December. Meanwhile, 62% of builders provided sales incentives of all forms in January. This has remained stable between 60% and 62% since October.

But that may not last as the year goes on, said Robert Dietz, NAHB’s chief economist.

“As home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and, or shortages of lumber, lots and labor,” he said.

That could push home prices higher.

“I do expect to see another bump or spike (in demand) come into the buying season, which usually comes here right after the Super Bowl and then February into the Spring Market. I think there’s a lot of pent-up demand. So I think we’re going to see a really big Spring,” homebuilder Travis Lam said.

Applications for mortgages climb

As rates have trended lower, mortgage applications for all types of homes and for both a purchase or to refinance, have climbed, according to separate report from the Mortgage Bankers Association released on Wednesday.

Mortgage applications jumped up 10.4% from one week earlier, according to MBA’s Weekly Mortgage Applications Survey for the week ending January 12.

Still, applications are comparably lower than they have been in the past.

Applications to purchase a home were up 9% on a seasonally adjusted basis from the week before, but were down 20% from a year ago.

However, applications to refinance a mortgage have showed more life. They were up 11% from the previous week and were 10% higher than a year ago.

The increases were heavily driven by the conventional loan market, said Joel Kan, MBA’s vice president and deputy chief economist.

“If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months,” said Kan.

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