It’s amazing what expectations for lower interest rates can do to bolster sentiment across an economy.
The mood among America’s homebuilders improved for a third consecutive month in February, an update released on Thursday showed.
At 48, the NAHB’s gauge beat estimates and now sits at a six-month high. Recall that January’s month-to-month gain, seven points, was tied for the largest since summer of 2020, when the US housing market rebounded from the original pandemic shock.
If you don’t include the pandemic era, the two-month gain (i.e., the 11-point increase across January and February) counts among the largest in the history of the series, which dates back to 1985.
Context is important. The brutal three-month Treasury selloff which commenced in August amid oversupply concerns and consternation at the pitiable state of American government, spilled over into mortgage rates, which flirted with 8% in October. That sharp increase was enough to offset an otherwise favorable environment for builders, who benefited from being the only game in town last year amid an acute dearth of resale inventory.
The situation turned around in November, when Treasury cut its quarterly borrowing estimate and deliberately undershot market expectations for coupon increases, triggering a sharp drop in yields. Mortgage rates subsequently tumbled. Now we’re at a crossroads.
“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” NAHB Chairman Alicia Huey said Thursday.
In 2024, Treasury yields have retraced some of the epic November-December bond rally, and mortgage rates are now drifting commensurately higher.
Rates, Huey went on, “remain too high for many prospective buyers,” but the NAHB expects “pent-up demand” will win the day assuming rates manage to meander lower over the balance of the year.
Key to that is obviously Fed policy. NAHB Chief Economist Robert Dietz on Thursday cited “future expectations of Fed cuts in the latter half of 2024,” in forecasting a 5% increase in single-family starts this year. He said the YTD increase in 10-year US yields constitutes “a further reminder that the recovery will be bumpy.”
Do note: Lower rates can help builders sustain margins by reducing the need to offer incentives and price cuts. This month, for example, a quarter of builders said they slashed prices, down half a dozen points from January, and the share of builders dangling incentives fell to 58%, the lowest since — you guessed it — August, when the Treasury selloff accelerated, driving up rates.
According to Redfin’s Dana Anderson, median US home-sale prices jumped more than 6% YoY during the four weeks to February 11. That was the most pronounced gain in 16 months. “Mortgage rates are rising, too, exacerbating high prices to drive costs up,” Anderson said Thursday, noting that “would-be buyers” are being “push[ed] to the sidelines.” Again.
