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Builder sentiment sharply increased in January thanks to mortgage rates falling under 7% over the past month. According to the NAHB/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly built single-family homes jumped seven points to 44.

“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,” says NAHB chairman Alicia Huey. “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.”

Although mortgage rates have fallen below 7% over the past month, many builders continue to reduce home prices to improve sales. In January, 31% of builders reported cutting home prices, which is down from 36% during the previous two months and the lowest rate since August. Unchanged from the previous month, the average price reduction in January remained at 6%. Sixty-two percent of builders provided sales incentives of all forms in January. The share has remained stable between 60% and 62% since October.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” All three of the major HMI indices posted gains in January.

The HMI index charting current sales conditions increased seven points to 48, while the component measuring sales expectations in the next six months jumped 12 points to 57. The component gauging traffic of prospective buyers rose five points to 29.

Considering the three-month moving averages for regional HMI scores, the Northeast jumped four points to 55; the South increased two points to 41; the West registered a one-point gain to 32; and the Midwest stayed at 34.

“Mortgage rates have decreased by more than 110 basis points since late October per Freddie Mac, lifting the future sales expectation component in the HMI into positive territory for the first time since August,” says NAHB chief economist Robert Dietz. “As home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots, and labor.”