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Home builders are feeling more optimistic about the housing market as they start to look forward to the potential of the Federal Reserve cutting rates later this year, a move that will help lower borrowing costs for home loans, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).
The index showed in February that builder confidence for the new single-family market was at its highest since August amid increased interest from buyers who are exploring the potential of acquiring properties as rates have declined from their highs in the fall of last year.
"Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers," NAHB chair Alicia Huey said in a statement.
Mortgage rates hit 8 percent in October and led to a slowdown with both buyers and sellers reluctant to enter the market. Buyers struggled to afford the higher monthly payments while sellers were scared off from relinquishing their lower mortgages for home loans that were historically high.
Interest on home loans has fallen since then and is hovering at levels near 7 percent right now after spending a few weeks in the mid-6 percent range. The Federal Reserve, after hiking its funds rate to two-decade highs in the 5.25 to 5.5 percent range, signaled last month that policymakers are at the end of their hiking cycle and may slash borrowing costs sometime this year.
Huey expected that demand for homes will increase as rates fall, which is buoying confidence among builders.
On Thursday, Freddie Mac revealed that as of February 15, the 30-year fixed-rate mortgage rose to nearly 6.80 percent. The previous week it averaged at 6.64 percent.
"While mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year," Huey said.
NAHB forecasts single-family starts, a phrase that refers to the beginning of construction, will go up 5 percent this year on the back of an expectation of rate cuts, but some dynamics in the market could potentially slow market growth.
"As builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages," NAHB chief economist Robert Dietz said in a statement.
Builders are slowing down some price incentives they were offering buyers over the last few months to boost sales, NAHB said. Fewer builders are slashing prices in February compared to last month though the average reduction has stayed steady.
About the writer
Omar Mohammed is a Newsweek reporter based in the Greater Boston area. His focus is reporting on the Economy and ... Read more