Home Builder Confidence Surges as Interest Rates Fall

Falling rates for home loans gave a stronger-than-expected boost to the confidence of home builders in January.

The National Association of Home Builders said its barometer of builder confidence surged to a reading of 44 in January, up from 37 in the prior month. Economists had projected the index would remain flat or tick up slightly.

The jump in confidence is largely attributable to a sharp decline in mortgage rates. After rising to nearly 8 percent in October, the average fixed rate on a 30-year mortgage has fallen to 6.66 percent, drawing in more buyers.

“Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Single-family starts are expected to grow in 2024, adding much-needed inventory to the market. However, builders will face growing challenges with building material cost and availability, as well as lot supply.”

“Mortgage rates have decreased by more than 110 basis points since late October per Freddie Mac, lifting the future sales expectation component in the HMI into positive territory for the first time since August,” said NAHB Chief Economist Robert Dietz. “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.”

Many existing home owners have mortgages with rates below four percent. As a result, they are reluctant to sell their home because buying a new one would require taking on a mortgage with a much higher rate. This has led to a very low volume of sales of existing homes but boosted demand for new homes and home building.

Mortgage rates were pulled down by the broader loosening of financial conditions in December. Yields on 10-year Treasuries, which are closely linked to mortgage rates, fell below four percent after the Federal Reserve showed it expects to be ready to cut interest rates in 2024. The market is currently pricing in a cut as early as March and four or five cuts after that, going beyond the three cuts Fed officials projected a their December meeting.