The decline in mortgage rates in December has breathed fresh hope into the homebuilding sector.
The National Association for Home Builders index, compiled with Wells Fargo, rose to 37 in December from 34 in the previous month. Economists had expected the index to climb a bit less after plunging six points in November.
A sharp decline in mortgage rates fueled the increase in builder sentiment. The average rate on a new 30-year fixed mortgage fell from around 7.8 percent in early November to 6.95 percent last week. That is the lowest rate since August.
“The housing market appears to have passed peak mortgage rates for this cycle, and this should help to spur home buyer demand in the coming months,” NAHB Chief Economist Robert Dietz said.
“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama.
The builder confidence index is comprised of three major ingredients: sales expectations over the next six months, traffic of prospective buyers, and current sales conditions. In December, the sales expectations and traffic gauges improved while the current sales conditions gauge was unchanged.
The pick-up in builder confidence could complicate the Federal Reserve’s plans not to raise rates further and move toward cutting rates next year. The projections of Fed officials released last week indicated a median expectation among U.S. central bankers that they will cut their overnight borrowing rate target by 75 basis points next year.