Does Better Than Expected Homebuilder Sentiment Mean The Real Estate Market Could Be Turning?

Key Takeaways

• February’s housing report marks the first month-over-month increase in homebuilder sentiment since late 2021
• After hitting a high of 7.37% in October 2022, mortgage rates are making their way back down to a more reasonable range, resulting in increased buyer demand
• Although housing enthusiasts are interpreting the data to be a sign of a bull market waiting right around the corner, homebuilder sentiment data is just one of many factors to consider as part of an effective investing strategy

Homebuilder sentiment, consumer confidence levels, mortgage rates, the cost of building materials, and unprecedented levels of inflation have created a real estate market that’s brimming with uncertainty.

The past few years have been rough on the real estate market for prospective buyers and investors alike. House prices soared during the pandemic, and even though rising interest rates slammed the brakes on sales figures, prices have remained stubbornly high.

It’s meant that prices haven’t come down much for those looking to buy, but mortgage repayments have gone up significantly. For homebuilders, it’s creating a challenging market that has seen them resort to all manner of incentives to get it going again.

They’ve had some help from falling interest rates, and they’re obviously starting to feel a little more positive about their prospects in the short term.

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Making Sense of Homebuilder Sentiment and the Housing Market Index

Every month, Wells Fargo and the National Association of Home Builders send out surveys to NAHB members to share their thoughts on the current state of the real estate market. This data helps them to determine their market outlook for the next six months.

Once gathered, it’s then collected, organized, and published into the housing market index (HMI) report.

Homebuilder sentiment is one of the more important figures contained in the HMI report. It’s used to measure the likelihood of growth in the real estate market, and it’s based on the opinions of the people who actually build the houses that drive growth.

The monthly release of the latest HMI data is a widely anticipated event for many real estate investors, who use it to gauge the overall health and activity within the U.S. housing market. The HMI report measures homebuilder sentiment and other confidence levels on a scale of 1 to 100.

Anything under 50 represents a generally negative outlook, so the higher a score is above 50, the more optimistic the market outlook. Homebuilder sentiment in the US housing market got down to 31 in December 2022.

In this latest report it’s risen from 35 to 42, which represents the largest gain in almost a decade, outside of the strangeness of the 2020 Covid rebound. This figure is significantly higher than the median analyst prediction of 37.

Still, it’s been a dramatic 12 months for the real estate market. This time last year the index sat at 81, and with any number below 50 representing negative sentiment, it’s clear that homebuilders aren’t ready to pop any bottles just yet.

In parts of the country where housing prices are highest, homebuilder sentiment tends to be lower. Likewise, stronger homebuilder sentiment is more likely to be found in areas with more affordable housing prices.

In the latest report, the biggest regional increases were In the southern and northeastern US, where sentiment scores jumped 4 points. While in the west and midwest, sentiment scores rose by 3 point and 1 point, respectively.

Although some experts and analysts might believe mortgage rates have peaked for the time being, things are rarely so simple. Current inflation levels are making it increasingly difficult for builders to source building products at good prices, which makes it hard to build affordable homes.

What this means for first time buyers

The market is probably a way off from boom times, but these are signs that it could be starting to (slowly) turn. For first time buyers who have been planning to buy, the potential for losing interest rates will most likely be needed before many of them can take the plunge.

In the meantime, getting together the biggest down payment possible is one of the best ways to smooth the buying process.

When you’re making decisions that are as big as buying a house, there are a lot of important questions to ask yourself.

Knowing you’ll be able to save enough to make an adequate down payment can be difficult even the best of times. But trying to decide whether not to invest most of your money in the most expensive asset said you’ll ever own during a time when there’s uncertainty all around you can raise the stakes significantly.

The bottom line

If you’re looking to get together a deposit for your first home, or trying to increase what you already have, investing is one of the most powerful tools at your disposal. But, you probably don’t want to take a lot of risk with that money either.

The last thing you want to is for the housing market to finally move to a position where you can afford to buy, only to see your investment portfolio down significantly. That’s always a risk when investing in the stock market.

So if you’re looking for a way to grow your funds while minimizing risk, take a look at Q.ai’s Inflation Kit or Precious Metals Kit. These Kits offer the potential for gains that above what you might get in a savings account or CD, without having to worry about the high risk volatility you can find in a stock market portfolio.

With AI on your side, Q.ai can help you make smarter investing decisions in less time.

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