Residential contractors see a rebound on the horizon

Dive Brief:

Residential builders are cautiously optimistic about the housing market, despite lingering high construction costs and supply chain issues, according to a new National Association of Home Builders report.
Easing mortgage rates caused builder confidence in the single-family sector to post its strongest Housing Market Index reading since September, according to the report, while other data indicates the housing market is stabilizing off a cyclical low. The HMI gauges builder perceptions of current home sales and sales expectations for the next six months.
“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” said Robert Dietz, NAHB chief economist. “Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle.”

Dive Insight:

The building market should achieve stability in the months ahead despite the ongoing volatility of mortgage rates and construction costs, said Dietz. That should then lead to a rebound back to higher home construction levels later in 2023 and the beginning of 2024, he added.

The average 30-year fixed rate mortgage peaked at 7.08% in October, according to Freddie Mac. That has since declined to approximately 6.1% at the start of February. About 80% of builders said lower rates have positively impacted business, according to a HomeSphere and BTIG report on the residential market.

“Conditions continue to be sluggish overall,” said Carl Reichardt, analyst with BTIG, a San Francisco-based financial services firm. “But we believe the environment is improving heading into the spring selling season.”

Still, the 10-year Treasury rate has moved up more than 30 basis points during the past two weeks, indicating an increase for mortgage rates lies ahead, according to the NAHB report.

Nevertheless, while still below the breakeven line of 50, all three components of the HMI posted gains for the second consecutive month. Current sales conditions in February jumped six points to 46, while sales expectations rose 11 points to 48 and traffic from prospective buyers increased six points to 29.

“The nation continues to face a sizable housing shortage that can only be closed by building more affordable, attainable housing,” said Alicia Huey, NAHB chairman. “However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall.”

Other noteworthy data in the NAHB report show:

31% of builders reduced home prices in February, down from 35% in December and 36% in November.
The average price drop in February hit 6%, down from 8% in December and tied with 6% in November.
57% of sellers offered some kind of incentive in February, down from 62% in December and 59% in November.