Confidence among builders in the U.S. housing market increased more than expected in April as declining mortgage rates and low inventory helped drive demand higher for new homes.
The National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, rose one point to 45, the highest reading since September.
Despite the increase, the index still points to a slump in the housing sector ahead of the pivotal spring-selling season. Any reading above 50 is considered positive; prior to 2022, the gauge has not entered negative territory since 2012, excluding a brief – but steep – drop in May 2020.
“For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates,” said Alicia Huey, the NAHB chair and a custom home builder and developer from Birmingham, Ala. “Builders note that additional declines in mortgage rates, to below 6%, will price-in further demand for housing.”
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The index has fallen to half of what it was just one year ago, when it stood at 81, although it has increased from a low of 31. It peaked at a 35-year high of 90 in November 2020, buoyed by record-low interest rates at the same time that American homebuyers – flush with cash and eager for more space during the pandemic – started flocking to the suburbs.
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The interest rate-sensitive housing market has borne the brunt of the Federal Reserve’s aggressive campaign to tighten policy and slow the economy.
Policymakers already lifted the benchmark federal funds rate nine straight times – well into restrictive territory – and have opened the door to a tenth rate hike in May as they try to crush stubborn inflation that is still running about three times higher than the pre-pandemic average.
Still, demand has shown early signs of returning as mortgage rates fall from a record high of 7.08% in November.
The average rate for a 30-year fixed mortgage dropped to 6.27% last week, according to data from mortgage lender Freddie Mac. However, that remains significantly higher than just one year ago, when rates hovered around 5%.
Limited inventory has also bolstered demand this month. A recent report from realtor.com showed that while the number of available homes on the market in March is down more than 50% from the typical amount before the pandemic began.
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“Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%,” said Robert Dietz, NAHB chief economist.