The most widely used gauge of home builder sentiment is the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The index is based off of a survey of NAHB members, the survey asks them to rate their outlook on three different components of the single-family housing market. (1) Current sales conditions, (2) Sales expectations going forward, and (3) Prospective buyer traffic. The over/under level for optimism and pessimism is 50.
The index rose 2 points to 43 in October, exceeding Wall Street expectations of 42. Despite home buying being rather slow in recent months, home builders' optimism is increasing as they expect mortgage rates to decline and have already seen inflation on the decline. NAHB Chairman Carl Harris said, “While housing affordability remains low, builders are feeling more optimistic about 2025 market conditions. The wild card for the outlook remains the election, and with housing policy a top tier issue for candidates, policymakers should be focused on
supply-side solutions to the housing crisis.” It’s important to note that this increase in optimism is based on the expectation that the Fed will continue to cut rates, and the expectation that both interest and mortgage rates will be quite a bit lower come 2025. Until then, buyers still remain tentative as the cost of borrowing remains high.
NAHB Chief Economist Robert Dietz added, “Despite the beginning of the Fed’s easing cycle, many prospective home buyers remain on the sideline waiting for lower interest rates. 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.” Mortgage rates are down over 1% since the same period last year, this is extremely good news for buyers. However, the current mortgage rate, roughly 6.44% for a 30-year fixed, is far higher than the average for the last decade and a half. The hope is that as the Fed continues to cut rates, making borrowing costs cheaper, more buyers will flood into the housing market.
New-home construction data for September was also just released. It looks as if builders are scaling back on construction while waiting for more rate cuts from the Fed. This goes to show that both buyers and builders are in a period of hesitancy, waiting for monetary conditions to ease before really getting comfortable moving forward. Construction of new homes fell 0.5% in September, bringing us to an annual pace of 1.35 million. New-home construction is down 0.7% from the same time last year. The indicator for future construction projects, new building permits, decreased 2.9% to an annual pace of 1.43 million.
The health of the housing market has been extremely demand-driven in the last year. So, seeing as the Fed is now cutting interest rates, builders are holding off on new projects until supply and demand levels can get closer to equilibrium. This trend may continue for a while, Sal Guatieri of BMO wrote, “With affordability still a pressing issue in many regions, home building will likely remain stagnant until the Fed is well into its easing cycle and mortgage rates have fallen another one percentage point,” Fortunately, this should mean that we have reached the end of a backslide, and the housing market is now ready to begin an upward trend in buying and project starts. This upward trend may take a few months to kick in as the effects of the Fed’s rate cuts slowly permeate throughout the economy. Odeta Kushi, Deputy Chief Economist at First American wrote, “Despite pent-up demand in the housing market, elevated financing costs continue to challenge both buyers and builders…While builders are growing more confident in their ability to sell newly built homes, they continue to face supply-side hurdles to building them, from higher construction costs to ongoing skilled labor shortages. Lower interest rates may help stimulate progress, but momentum will likely be constrained by these persistent challenges."
As with so many other aspects of our current economy, the housing market is in a period of hesitancy. Both buyers and sellers are waiting for further rate cuts to improve monetary conditions, this should flood the market with new buyers and new project starts as borrowing and building become more affordable.
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