Confidence among U.S. single-family home builders rose in February for the second-straight month, a sign of continued improvement in a beaten down housing market.
The National Association of Home Builders/Wells Fargo's gauge of builder sentiment increased 7 points to 42, figures released Wednesday showed. This reading is the strongest figure since September 2022.
“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” NAHB Chief Economist Robert Dietz wrote in a press release.
“Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle. And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024,” Dietz added.
Last year, confidence among builders fell consistently amid higher material costs, rising interest rates, and a pullback in demand. Data from the National Association of Homebuilders showed construction costs climbed more than 30% in 2022, plagued by elevated inflation, higher mortgage rates, and supply chain disruptions.
Since the start of the new year the housing market has shown signs of stabilization, with mortgage rates steering downward from a peaks of over 7% in November. Some major builders have even increased their pace in new builds for the year, including PulteGroup (PHM) and D.R. Horton (DHI).
The latest survey showed construction for entry-level homes remains an area of concern for homebuilders. About 57% of builders were still offering some kind of incentive to attract buyers this month. Still this marked an improvement from 62% in December and 59% in November.
Thirty-one percent of builders slashed their home prices this month, down from 35% in December and 36% in November. About 6% dropped their average home prices in February, down from 8% in December.
According to NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama, the stronger optimism among homebuilders could leverage more buyers to the market.
“The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing,” Huey added.
“However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall,” Huey said.
The group’s measure of current sales conditions increased in February, while sales expectations for the next six months also rose, and the gauge of upcoming buyer traffic increased, too.
Builder sentiment rose across all regions in the Northeast, Midwest, South, and West.
Interest rate outlook
As inflation shows signs of easing, the NAHB said late last month it expects the Federal Reserve will increase short-term interest rates by another quarter-point increase in March.
Since that release, stronger-than-expected jobs data and inflation have pushed some economists to forecast an additional rate hike from the central bank in May.
"Falling rates will set the stage for a housing rebound later in 2023, and a better affordability environment will lead to a recovery of housing demand," Dietz said last month.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv