Homebuilders See Brighter Future As Mortgage Rates Fall

Homebuilders are preparing to ramp up production as mortgage rates continue to fall, making homebuying more affordable for their customers.

Homebuilder confidence rose to its highest since September this month, according to the National Association of Homebuilders/Wells Fargo Housing Market Index, the association said Wednesday. The index, which combines current sales, projected sales, and traffic from prospective buyers, rose for a second month in a row as mortgage rates have fallen since late October.

The data adds to recent signs that falling mortgage rates are somewhat revitalizing a housing market that had been all but paralyzed recently by the highest mortgage rates in more than two decades. Since early 2022, the average rate offered for a 30-year mortgage surged from the record lows of the pandemic era to as high as 7.79% in late October, according to data from Freddie Mac. Cooling inflation has helped push the rate down to 6.66% as of last week, easing the affordability crush faced by 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,” association chair Alicia Huey said in a press release. “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.”

The association survey echoed comments from homebuilding industry executives in recent earnings calls.

In a December call, executives at Hovnanian Enterprises (HOV), a national homebuilder based in New Jersey, said the pace of sales had picked up as mortgage rates slid down from their recent peak. Executives at Toll Brothers reported a similar trend.

“We are anticipating a modestly better trend this year as we are encouraged by the recent 75 basis point decline in mortgage rates,” Toll Brothers (TOL) CEO Douglas Yearley said in a December earnings call. “With inflation easing over the past few quarters, we believe rates may drop further and the timing of the rate decline is setting up nicely for the upcoming spring selling season.”

More homebuilding is just what the market needs, according to housing experts who say a chronic housing shortage has contributed to the record high prices and unaffordable conditions in the current market. There are 6.5 million fewer single-family homes than the market demands, a recent analysis by Realtor.com found.