The National Association of Homebuilders’ Housing Market Index rose 3 points to 66 in May—a seven month high—helped by lower mortgage rates and improved sales of new homes. The increase added momentum to this year’s upward trend following a low at the end of 2018. A reading above 50 indicates more builders see conditions as good than poor.
While stable interest rates may lure buyers to open houses, builders are not yet out of the woods. Homes must be affordable. High land, labor and regulatory costs have not abated, and homebuilders must be creative in tackling affordability issues.
Source: Bloomberg
Fed move unlikely
The rise in interest rates during the fourth quarter of 2018, combined with general affordability issues, was responsible for a steep decline in homebuilder sentiment that led to last year’s index low of 56.
There is no silver bullet in the housing affordability challenge but steady interest rates and proactive planning can prolong the current housing cycle.
Through early 2019, the Federal Reserve has stated that it is in a wait and see mode regarding future rate moves, with most economists expecting status quo in 2019 and likely through 2020. While it is common belief that low interest rates are good for the housing market, the fact that they will likely remain low for a sustained period is an added positive for the market. Homebuyers are then less likely to wait for another interest rate drop in hopes of finding a better deal and will start to move forward with their purchase plans.
KB Home recently announced that it is adjusting its floor plans to target first-time homebuyers at a more affordable entry point, while William Lyon Homes has focused on more density to tackle affordability issues. There is no silver bullet in the housing affordability challenge but steady interest rates and proactive planning can prolong the current housing cycle.
