Housing Heats Back Up

Mortgage rates are falling while the number of homes for sale remains constrained. That is good news for home builders.

By Justin Lahart

Mortgage rates have come back down, and that is going to help would-be home buyers. It will help home builders even more and has already helped their stocks a lot.

The Mortgage Bankers Association on Wednesday reported that in its latest survey of lenders the average contract interest rate on a 30-year mortgage fell to 6.83% last week from 7.07% the previous week. That is still steep, but it is much better than the 23-year high of 7.9% registered in October. It brings mortgage rates back to their June levels.

Already the decline in rates appears to have rekindled interest in home buying: The National Association of Home Builders on Monday said that traffic among prospective new home buyers has picked up from last month. And builders are acting as if there are good times ahead: The Commerce Department on Tuesday reported that a seasonally adjusted 1.143 million single-family homes were started in November, at an annual rate, versus 969,000 in October and the most since April 2022. New building permits for single-family homes—a leading indicator of home-construction activity—hit their highest level since May of last year.

This counts as good news for the economy. Earlier this month economists were pretty sure that housing would weigh on fourth-quarter gross domestic product. Now it looks as if it might provide a bit of a boost.

Even though mortgage rates have come down, however, they would probably need to decline much more to substantially unlock the market for previously owned, or existing, homes. The National Association of Realtors reported that a seasonally adjusted 3.82 million existing homes were sold in November, up from October’s 3.79 million, but outside of that the fewest since August 2010.

This figure seems likely to improve in the months ahead, especially since existing-home sales aren’t recorded until sales are closed. But the report also showed that there were just 1.13 million existing homes for sale in November, which compares with a November average of 1.79 million in the five years preceding the pandemic. The lock-in effect, where homeowners are unwilling to sell and give up the much lower mortgage rates they are paying, persists. It likely would continue to at least some degree even if mortgage rates fell by another percentage point.

For home builders, this counts as more good news. The dearth of existing homes for sale has already led to more potential customers to their doorsteps: The Mortgage Bankers Association reports that even though its index of mortgage applications for all home purchases was down in November from a year earlier, mortgage applications for new-home purchases were up 21.8%.

None of this has been lost on investors: The S&P Homebuilders Select Industry Index is up nearly 40% from its October closing low. Builder stocks’ ratios of price-to-book value still don’t look exceedingly high, but it is hard to argue they are downright cheap. The home-building business might be getting easier, but the easy money in home-building stocks might have already been made.

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