Builder Confidence Higher in February

WASHINGTON – Builder confidence improved for the third straight month, bolstered by increasing buyer traffic, anticipated rate cuts by the Federal Reserve and the ongoing lack of existing inventory.

In February, builder optimism in the market for newly built single-family homes climbed four points to 48 – the highest level since August, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.

At the same time, a growing number of builders are cutting back on reducing home prices to boost sales.

In February, 25% of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023. However, the average price reduction in February held steady at 6% for the eighth straight month.  Meanwhile, the use of sales incentives is also diminishing. The share of builders offering some form of incentive dropped to 58% in February, down from 62% in January and the lowest share since last August.

All three of the major HMI indices posted gains in February:

• The HMI index charting current sales conditions increased four points to 52.
• The component measuring sales expectations in the next six months rose three points to 60.
• The component gauging traffic of prospective buyers increased four points to 33.

Looking at the three-month moving averages for regional HMI scores, the Northeast increased three points to 57, the Midwest gained two points to 36, the South rose five points to 46 and the West registered a six-point gain to 38.

While builders have challenges, such as lot and labor shortages, there’s room for optimism, NAHB Chief Economist Robert Dietz said.

“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5% this year,” he said.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

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