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The downturn in mortgage interest rates that began in November finally has homebuilders feeling better.
Builder sentiment rose 2 points to 58 in January on a monthly index from the National Association of Home Builders. This came after two months of sharp drops in sentiment to the lowest level in more than two years. The index stood at 72 last January. Anything above 50 is considered positive.
"The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment," said NAHB Chairman Randy Noel. "Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months."
Of the index's three components, current sales conditions rose 2 points to 63. Sales expectations over the next six months increased 3 points to 64 and buyer traffic through new home models rose 1 point to 44. Buyer traffic is the only component in negative territory.
Some of the nation's largest public homebuilders reported weak quarterly earnings last week, indicating a slowdown in sales. The CEOs of KB Home and Lennar indicated that high prices had sidelined buyers, especially as mortgage rates rose in the early fall. Now that rates are lower, builders could see renewed demand.
Builders, however, are not lowering prices significantly. There remains a tight supply of homes for sale at the entry level because builders are unable to profit as much on lower-priced homes.
"Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market," said NAHB chief economist Robert Dietz. "Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year."
Regionally, on a three-month running average, sentiment in the Northeast fell 5 points to 45. Sentiment in the Midwest and South both fell 3 points to 52 and 62, respectively, The West saw a 1-point drop to 67.
Monthly housing starts and builder permits will not be released Thursday, due to the partial government shutdown. The NAHB estimates that the December government data would show that single-family starts ended the year totaling 876,000 units, a 3 percent gain over the 2017 total of 848,900. The association noted that the slowdown in sales during the fourth quarter has left new home inventories elevated in some markets.