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Homebuilder sentiment rises as interest rates stay in check

CNBC logo CNBC 2/19/2019 Diana Olick and Lisa Rizzolo

The nation's homebuilders are feeling better about the state of their industry as lower interest rates boost consumer confidence.

Builder sentiment rose 4 points to 62 in February, according to a monthly survey from the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The survey stood at 71 in February of last year. Anything above 50 on the index is considered positive.

Sentiment fell at the end of last year, largely because mortgage rates jumped in the fall, hurting affordability. Newly built homes come at a price premium to existing homes, so higher interest rates can have an outsize effect on the new construction market. Interest rates then fell sharply at the end of the year and have remained lower so far this year.

"Ongoing reduction in mortgage rates in recent weeks coupled with continued strength in the job market are helping to fuel builder sentiment," said NAHB Chairman Randy Noel. "In the aftermath of the fall slowdown, many builders are reporting positive expectations for the spring selling season."

Of the index's three components, buyer traffic moved up 4 points to 48. Current sales conditions rose 3 points to 67, and sales expectations over the next six months increased 5 points to 68. February marks the second month where all three of the indexes showed gains.

Sales of newly built homes have been hard to read, due to the recent government shutdown and delays in reporting from the U.S. Census. Several sources noted a sharp decline in sales toward the end of the year, with a slight improvement in January. Mortgage applications to purchase newly built homes were flat in January compared with January 2018, according to the Mortgage Bankers Association. The cost to build homes continues to be a concern.

"Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points," noted NAHB Chief Economist Robert Dietz.

Housing starts and builder permits data have not been reported since last year, but they have been running well below both demand and historical averages since the housing crash. While single-family starts are slowly rising, there continues to be a critical shortage of homes for sale, especially at lower, more affordable price points.

Builders are still focused most on the move-up sector of the housing market, as the costs of land, labor and materials continue to run high, making it more difficult financially to build lower-priced homes.

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