February 15, 2024

Homebuilder confidence rose 4 points in February to 48, after climbing 7 points in January and 3 points in December.  Thus, confidence has risen 14 points in the past three months as mortgage rates have declined by a percentage point.   But keep in mind that the breakeven point for this series is 50.  Thus, builders are still cautious. but far less so than they were a couple of months ago.  This series hit bottom in December 2022 at 31. Rising mortgage rates which reached 7.8% at the end of October 2023 spooked builders.  While there was a precipitous slide in homebuilder confidence in the fall, there is hope that conditions have improved and will continue to improve in the months ahead because mortgage rates have since retreated to 6.7%

NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama  said, “Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers.  And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.”

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.  But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year.”

Traffic through the model homes rose 4 points in February to 33 after gaining 5 points in January and 3 points in December.  The drop in mortgage rates in recent months has resulted in at least a few more potential buyers.

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The homebuilders expectations index climbed 3 points in February to 60 after having surged by 12 points in January and 6 points in December.  The drop in mortgage rates and still steady growth in the economy has encouraged builders that conditions in the housing market will improve steadily throughout 2024.  However, worker shortages and limited supplies of some building materials will dampen builders enthusiasm.

Mortgage rates rose sharply last year from 3.1% at the end of 2021 to 7.8% by the end of October clearly dampened builder enthusiasm, but the recent drop in mortgage rates to the 6.7% mark should spur a further rise in starts in the months ahead.

Home prices rose sharply for almost two years from mid-2020 through the spring of last year.  They then fell for eight consecutive months.  An acute shortage of homes available for sale has caused prices to climb again in recent months  However, if builders ramp up the pace of production and more houses become available, prices should decline somewhat later in the year.

If home prices begin to decline somewhat, and mortgage rates gradually decline to the 6.25% mark, housing affordability should rise sharply as the year progresses.

We expect GDP to increase 1.8% in the first quarter as firms keep hiring new workers at a steady pace, wages keep climbing, and  the unemployment rate remains at or below the full-employment threshold of 4.0%.

Stephen Slifer

NumberNomics

Charleston, SC