The NAHB index is doing double duty this month and serves as a replacement for missing housing starts data. (Photo by Justin Sullivan/Getty Images)
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The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index rose five points in October to 37, the highest level since April and the largest month-over-month improvement since January 2024. The index, based on a monthly survey of single-family builders, measures confidence in current and expected sales conditions on a scale of 0 to 100. Numbers above 50 indicate that more builders view conditions as good than bad, meaning that while pessimism is decreasing, it is still widespread.
The October data is especially useful for analysts trying to gauge housing activity during the government shutdown. With the Census Bureau expected to delay its housing construction report, NAHB says its index can serve as a benchmark for trends in single-family home permits. Robert Dietz, chief economist at NAHB, said modeling of historical data shows the increase in sentiment among builders in October points to an increase in permits in September of about 3%.
The survey, created in 1985, asks builders to rate current sales, expected sales over the next six months and traffic from potential buyers. The index hit a record high of 90 at the end of 2020, when mortgage rates hovered around an all-time low, and fell as rates rose in 2022 from 83 in January of that year to 31 in December, when the Federal Reserve raised rates by half a percentage point to what was then a 15-year high.
More recently, sentiment fell to 32 in August and September this year, the lowest level since December 2022.
It is therefore no surprise that this month’s recovery comes as the central bank has changed course.
The Fed cut its benchmark interest rate last month for the first time since December 2024 and has indicated that more cuts are in the offing. Lower borrowing costs have already pushed down mortgage rates, improving affordability and encouraging cautious optimism among builders. That is important for the broader economy. Housing is often an early signal of shifts in monetary policy, because changes in mortgage rates quickly affect demand for new housing.
“The 30-year fixed-rate mortgage fell from just above 6.5% in early September to 6.3% in early October,” said Robert Dietz, chief economist at NAHB. Builders, he added, expect a “slightly improving sales environment” as rates fall, even as labor shortages and construction costs remain hurdles.
The new report is also good news for investors in homebuilding stocks, a sector that has been waiting for signs of relief. The SPDR S&P Homebuilders ETF ($1.9 billion in assets under management) is down 15% over the past year, lagging the S&P 500 by about 30 percentage points. Homebuilding stocks tend to rise faster than demand, and optimism among builders could be an early sign of stabilization after a rough patch.
Despite the recovery in October, sentiment remains subdued. Only one in three builders describe conditions as favorable, and 38% say they are cutting prices – an indication that buyers are still sensitive to financing costs. The average discount rose to 6% in October, compared to an average of 5% in previous months. Incentives remain common, with nearly two-thirds of builders offering them to close deals, which helps explain why new homes sell for less than existing ones.
Buddy Hughes, president of NAHB and a North Carolina builder, said the recent declines in interest rates are “an encouraging sign for affordability,” but that “most homebuyers are still sitting on the sidelines, waiting for mortgage rates to drop.”
That patience could soon pay off if the Fed continues to ease. Lower rates could bring more buyers back into the market, boosting new construction and housing-related jobs. The October index does not mark a recovery, but it does indicate something that has been missing over the past two years: momentum.
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