Sentiment among US home builders jumped to a four-month high this month, with the prospect of lower mortgage rates fueling optimism about demand for new houses in the coming year.
A measure of housing market conditions from the National Association of Home Builders and Wells Fargo increased for a second straight month to 43 in October. That beat the median estimate of 42 in a Bloomberg survey of economists.
The three components of the housing market index rose. The outlook for the next six months rose to the highest since April, while the gauge of prospective-buyer traffic and the index of present sales also improved.
After the Federal Reserve lowered interest rates by half a percentage point last month, labor-market and inflation data have come in stronger than expected and policymakers have talked of a more gradual approach going forward. That’s led to an uptick in mortgage rates, which have crept up from two-year lows they reached in September.
“We are forecasting uneven declines for mortgage interest rates in the coming quarters, which will improve housing demand but place stress on building lot supplies due to tight lending conditions for development and construction loans,” NAHB Chief Economist Robert Dietz said in a prepared statement.
While new-homes sales have ebbed and flowed over 2024, the biggest builders have been solidly profitable and taken market share from smaller companies, who generally have higher borrowing costs. The iShares U.S. Home Construction exchange-traded fund, comprised of large builders and related companies, is at an all-time high.
Builders are already looking forward to the vital spring selling season, with the expectation that lower borrowing costs will bring new customers into the market.
“With a lower rate environment, and given that the consumer has been a little more conditioned on these higher rates for the past couple of years or so, we’re expecting to see a pretty strong spring selling season given the right conditions,” KB Home Chief Financial Officer Jeff Kaminski said in an earnings call last month.
In the NAHB data, the share of builders cutting prices was unchanged at 32% in October. The average price reduction increased to 6%, returning to the long-term trend after dropping in September. And the share of builders that reported using sales incentives edged up to 62%.
The gains in the index were broad-based. On a three-month moving average basis, a metric that helps smooth short-term volatility, the gauge improved in the Northeast, Midwest and the West increased, while was steady in the South.
The government will give another snapshot of the new-home market on Friday, when it releases its residential construction report for September.
— By Michael Sasso (Bloomberg)
