Homebuilder sentiment in February improved by the biggest amount in a decade

America’s homebuilders are growing more bullish as buyer demand picks up, driven in part by slightly lower mortgage rates.

Homebuilder confidence in the market for newly built single-family homes in February rose seven points to 42, according to the National Association of Home Builders/Wells Fargo Housing Market Index. This is the highest reading since September and the largest monthly gain since June 2013.

Anything below 50 is considered negative, but sentiment had fallen to 31 in December. The index stood at 81 in February of last year, before mortgage rates began to rise.

Builders say affordability is improving, as mortgage rates fall back from their highs of last fall and start to settle in a narrow range. The average rate on the popular 30-year fixed mortgage had peaked at 7.37% last October, according to Mortgage News Daily but spent much of January in the low 6% range. Rates have moved up slightly in the past two weeks to the mid-6% range.

“With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” said NAHB Chairman Alicia Huey, a homebuilder and developer from Birmingham, Alabama. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.”

Huey called it “cautious optimism,” adding that affordable housing is still difficult to build, given higher costs for labor and materials.

Of the NAHB index’s three components, current sales conditions in February rose six points to 46. Sales expectations in the next six months increased 11 points to 48, and buyer traffic increased six points to 29.

Builders had been using strong incentives to offset higher mortgage rates, but they appear to be pulling back on those as rates settle.

NAHB reports 31% of builders reduced home prices in February, down from 35% in December and 36% in November. The average price drop in February was 6%, down from 8% in December, and tied with 6% in November. The share of builders offering any kind of incentive, like a mortgage rate buydown, fell to 57% e in February, down from 62% in December and 59% in November.

“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,” said NAHB chief economist Robert Dietz. “And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024.”

Regionally, looking at the three-month moving averages, sentiment in the Northeast rose 4 points to 37. In the Midwest it increased one point to 33, and in the South increased points to 40. In the West, where housing is least affordable, it rose three points to 30.