Builders' confidence in the U.S. housing market made a surprise leap into positive territory this month, jumping to the highest level since July as more home buyers gravitate toward new construction amid the ongoing shortage of existing homes.
The National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, rose three points to 51 in March, marking its fourth consecutive monthly rise.
Any reading below 50 is considered negative. This is the first time the index has climbed above the break-even point since July. Economists expected this month's reading to remain flat at 48.
"Buyer demand remains brisk and we expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year," said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kansas.
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"But even though there is strong pent-up demand, builders continue to face several supply-side challenges, including a scarcity of buildable lots and skilled labor, and new restrictive codes that continue to increase the cost of building homes," Harris added.
Sentiment among builders began steadily falling at the end of last summer after mortgage rates shot above 7%, throttling demand among would-be homebuyers. But borrowing costs have retreated in recent months as many investors believe the Federal Reserve is done with its aggressive interest-rate hike campaign – and will soon pivot to cutting rates.
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Rates on the popular 30-year fixed mortgage are currently hovering around 6.74%, according to Freddie Mac, down from a high of 7.79% at the end of October but well above the pre-pandemic average of 3.9%.
The recent decline has prompted a burst of optimism among homebuilders that the worst may be over. However, the housing market is facing new headwinds heading into 2024, including higher prices and shortages of labor and lumber.
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"With the Federal Reserve expected to announce future rate cuts in the second half of 2024, lower financing costs will draw many prospective buyers into the market," said NAHB chief economist Robert Dietz. "However, as home building activity picks up, builders will likely grapple with rising material prices, particularly for lumber."
FOX Business' Megan Henney contributed to this report.
