Builders continue to take financial hits to try to lure buyers
The recent dip in mortgage rates has made homebuilders more hopeful that they can once again start pouring concrete and raising roofs. But most are hedging their bets and many are still lowering prices or offering incentives to attract buyers.
Builders’ confidence rose from 34 to 37 points in December, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The index is based on a monthly survey of builders that includes various factors. “The HMI index gauging traffic of prospective buyers in December rose three points 24, the component measuring sales expectations in the next six months increased six points to 45 and the component charting current sales condition held steady at 40,” the report stated.
“Any number over 50 indicates that more builders view conditions as good than poor,” it noted. The increase in December, therefore, while positive, indicates that there is a long way to go before homebuilders have a broadly optimistic outlook. Regionally, only the Northeast’s HMI score rose above 50, with a two-point increase to 51 based on three-month moving averages. The Midwest dipped one point to 34, the South fell three points to 39 and the West sank four points to 31.
On the brighter side, the 50 basis point drop in mortgage rates in the past month has drawn more prospective buyers to scout out new homes.
Builders’ recent pessimism has been somewhat counter to gains for the pace of single-family permits and starts during this time frame, according to NAHB Chief Economist Robert Dietz.
“Our statistical analysis indicates that temporary and outsized differences between builder sentiment and starts occur after short-term interest rates rise dramatically, increasing the cost of land development and builder loans used by private builders,” Dietz commented.
“While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building,” he noted.
Dietz predicted that the gap between builder sentiment and construction activity would decrease once interest rates moderate.
Meanwhile, with mortgage rates still higher than 7%, builders continue to take financial hits to try to lure buyers. The NAHB data show that 36% cut home prices in December by an average of 6%, as they had in November, while 60% of builders offered sales incentives of all forms.
