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Builder confidence in the market for newly built single-family homes rose three points to 37 in December, ending a four-month decline, reports the latest NAHB/Wells Fargo Housing Market Index (HMI).

“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,” says NAHB chairman Alicia Huey. “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 HMI index gauging traffic of prospective buyers in December rose three points to 24. The component measuring sales expectations in the next six months increased six points to 45, and the component charting current sales condition held steady at 40.

On a regional basis, the three-month moving average for the HMI in the Northeast increased two points to 51. The Midwest fell one point to 34. The South dropped three points to 39, and the West posted a four-point decline to 31.

“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,” says NAHB chief economist Robert Dietz.

Dietz adds that the recent pessimism in builder confidence this fall has been somewhat counter to gains for the pace of single-family permits and starts during this period.

“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,” notes Dietz. “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.”

With mortgage rates still running above 7% throughout November, per Freddie Mac data, 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 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.