Real Estate

Homebuilders shrug off higher mortgage rates, stay optimistic on economic boost from tax cuts

Key Points
  • The National Association of Home Builders/Wells Fargo Housing Market Index checked in at 72, close to a cyclical high.
  • Higher rates aren't deterring home builders, at least for now.
Homebuilder sentiment unchanged in February

Tax cuts are still making homebuilders feel better, even as mortgage rates rise to the highest level in more than four years.

Builder confidence was unchanged in February from the prior month, remaining at 72 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Anything above 50 is considered positive sentiment.

The index is up from 65 in February 2017 and hit a cyclical high of 74 last December, just as the Republican tax cut plan was being passed.

"Builders are excited about the pro-business political climate that will strengthen the housing market and support overall economic growth," said NAHB chairman Randy Noel, a custom home builder from LaPlace, LA.

"However, they need to manage supply-side construction hurdles, such as shortages of labor and lots and building material price increases," he added.

Future sales expectations appear to be driving builder confidence. That component of the index rose to a post-recession high of 80, while the index measuring buyer traffic held steady at 54. Current sales conditions, however, fell one point to 78.

"With ongoing job creation, increasing owner-occupied household formation, and a tight supply of existing home inventory, the single-family housing sector should continue to strengthen at a gradual but consistent pace," said NAHB chief cconomist Robert Dietz.

One headwind for builders, however, is rising mortgage rates. Mortgage applications to purchase a newly built home jumped 18 percent in January year-over-year, according to the Mortgage Bankers Association, but rates moved even higher in the first two weeks of February.

The average rate on the 30-year fixed is now up more than 50 basis points since the beginning of the year. Not only do higher rates translate to less purchasing power for buyers, they also make it harder for some buyers on the margins of good credit to qualify for a home loan.

Builders are benefiting from the severe shortage of existing homes for sale, but new construction comes at a premium. Buyers may have rushed in in January, fearing rates would rise even more, which they did. If rates continue to move higher, some buyers will be priced out.

Looking at the three-month moving averages for regional HMI scores, the Midwest rose two points to 72, the South increased one point to 74, the West remained unchanged at 81, and Northeast fell two points to 56.