NAHB Housing Market Index Shows Some Life in December, First Improvement in 5 Months

NAHB/Wells Fargo housing market index moved up to 37 in December 2023 from 34 in November, ahead of forecasts of 36. It was the first improvement in sentiment in five months, bouncing off its lowest point since December 2022. The positivity came from declining mortgage rates that sparked increased interest among potential buyers and raised expectations for sales. The sub-index for expected home sales over the next six months went up to 45 from 39.

The fall in the housing market had been swift as affordability plummeted with high interest rates and inflation. Just back in July we saw the highest reading at 56 in this cycle and was just the second time that sentiment levels have surpassed the midpoint of 50 since July 2022. Mortgage rates have fallen roughly 50 basis points over the past month, according to Freddie Mac.

NAHB/Wells Fargo Housing Market Index (HMI) December 2023

Specifically, the sub-index for current single-family home sales remained steady at 40, while the sub-index for expected home sales over the next six months went up to 45 from 39. Additionally, the gauge for prospective buyers increased to 24 from 21.

Inflation struck out affordability for many. Confidence had been rising with a lack of resale inventory despite elevated interest rates, that appears to have waned though is picking back up. There is underlying strong demand for new construction driven by the limited housing supply, however buyers are now deferring purchases. Location is critical and rent plays a part.

US NAHB home builder sentiment December 2023

  • NAHB HMI 37 vs 36 expected Prior was (R) 34
  • Current single-family home sales 40 vs 40 prior
  • Sales over next six months 45 vs 39 prior
  • Traffic of prospective buyers 24 vs 21 prior

The most recent low was 31 in December 2022. The high for 2023 was at 56 in July. The high in 2022 was at 83 in January 2022.

United States NAHB Housing Market Index

NAHB is forecasting approximately a 5% increase for single-family starts in 2024 as financial conditions ease with improving inflation data in the months ahead.

“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, Ala. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”

“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, with the HMI component measuring future sales expectations up six points in December,” said NAHB Chief Economist Robert Dietz.

Regional HMI Scores

Looking at the three-month moving averages for regional HMI scores,

  • Northeast increased two points to 51,
  • Midwest fell one point to 34,
  • South dropped three points to 39
  • West posted a four-point decline to 31.
  • Northeast 49 versus 50 last month
  • Midwest 36 versus 39 last month
  • South 42 versus 49 last month
  • West 35 versus 41 last month

Share of builders reducing home prices:

  • As a result of the extended high interest environment, many builders continue to reduce home prices to boost sales.
  • In December, 36% of builders reported cutting home prices, tying the previous month’s high point for 2023. The average price reduction in December remained at 6%, unchanged from the previous month. Meanwhile, 60% of builders provided sales incentives of all forms in December, the same as November but down slightly from 62% in October.

NAHB September Report

Given that shelter inflation accounts for roughly 40% of the Consumer Price Index, Dietz added:

“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 noted. “In turn, higher financing costs for home builders and land developers add another headwind for housing supply in a market low on resale inventory. 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, thereby allowing more attainable housing supply to the market. Looking forward, as rates moderate, this temporary difference between sentiment and construction activity will decline.”

About National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)

Based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Source: NAHB

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