New Home Builder Confidence Remains High for Third Straight Month, According to NAHB Housing Market Index

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Builder confidence in the new housing market remains strong for the third straight month, according to the National Association of Home Builders Housing Market Index.

Three conditions fuel their optimism:

  • Mortgage rates are expected to fall further in the coming months
  • The prospect of future interest rate cuts by the Federal Reserve later this year
  • Lack of existing inventory

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on February 15, builder confidence rose four points to 48 in February, the highest confidence level since August 2023.

Even small interest rate cuts help, says the NAHB chairman

“Buyer traffic is improving because even small declines in interest rates will generate a disproportionately positive response from potential homebuyers,” said NAHB Chairwoman Alicia Huey, a builder and home developer based in Birmingham, Alabama. “And while mortgage rates are still too high. For many potential buyers, we expect many more buyers to enter the market as mortgage rates continue to fall this year due to pent-up demand.”

NAHB chief economist Robet Dietz said the expected rate cuts were positive while challenges remain.

“With future expectations of Fed rate cuts in the second half of 2024, NAHB forecasts single-family home starts will rise about 5% this year,” said NAHB Chief Economist Robert Dietz. “But as builders begin building more homes, land availability is expected to be a growing problem, along with a continued labor shortage.”

“And as a further reminder that the recovery will be bumpy as buyers remain sensitive to changes in interest rates and construction costs, the 10-year Treasury rate has risen more than 40 basis points since the beginning of the year,” Dietz said.

Disappointing lack of action on SALT

The SALT deduction allows taxpayers to deduct taxes paid to state and local governments – including property taxes – from their federal tax return. As of 2018, taxpayer listings were limited to a maximum deduction of $10,000 for all state and local tax deductions. The $10,000 cap has not been adjusted for inflation and is the same for singles and couples, incurring a significant marriage penalty.

Considering that home size, price, and property taxes tend to increase with family size, the current SALT deduction limits can be viewed as punishing families already struggling with high housing costs and rising inflation. The NAHB strongly supported the SALT Marriage Penalty Elimination Act.

However, in a procedural vote of 195-227, the House of Representatives on February 14 rejected a bill that would have temporarily doubled the state and local tax (SALT) deduction limit for married couples.

The SALT Marriage Penalty Elimination Act would have increased the cap on the SALT deduction for the 2023 tax year from the current limit of $10,000 to $20,000 for the current tax year for married taxpayers earning less than $500,000 earn per year. This would have allowed eligible taxpayers who file their 2023 tax returns now to take advantage of the expanded benefit immediately.

Based on the principle that taxes paid to state and local governments should not be double taxed as federal government income, the NAHB supports eliminating the SALT deduction cap entirely. Because this procedural vote failed, it is unlikely that additional legislation to change the SALT deduction cap will be considered this year.

Under current law, the $10,000 deduction limit will expire after 2025, along with many other tax provisions enacted as part of the 2017 Tax Reform Act. This deadline will force Congress to reevaluate the 2017 tax changes next year, including the cap on SALT deductions.

Builders are withdrawing price cuts and sales incentives

With mortgage rates below 7% since mid-December, more builders are slashing home prices to boost sales.

In February, 25% of builders said they had reduced home prices, compared to 31% in January and 36% in the last two months of 2023. However, the average price reduction in February remained constant at 6% for the eighth consecutive month.

The use of sales incentives is now also decreasing. The proportion of builders offering some form of incentive fell to 58% in February, compared to 62% in January and the lowest proportion since last August.

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