For the third straight month, builder confidence is remaining strong in the new house market, according to the National Association of Home Builders Housing Market Index.
Three conditions are fueling their optimism are:
- Expectations that mortgage rates will continue to moderate in the coming months
- The prospect of future rate cuts by the Federal Reserve later this year
- Lack of existing inventory
Builder confidence climbed four points to 48 in February, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released February 15. It’s the highest confidence level since August 2023.
Even Small Drops in Interest Rates Are Helping, NAHB Chair Says
“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.”
NAHB Chief Economist Robet Dietz said that anticipated rates cuts are positive, while on-going challenges remain.
“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5% this year,” said NAHB Chief Economist Robert Dietz. “But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages.”
“And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year,” Dietz said.
Disappointing Lack of Action on SALT
The SALT deduction allows itemizing taxpayers to deduct taxes paid to state and local governments — including property taxes — from their federal tax return. Beginning in 2018, itemizing taxpayers were limited to a maximum $10,000 deduction for all state and local tax deductions. The $10,000 cap was not indexed for inflation, and is identical for singles and couples, which imposes a sizeable 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 penalizing families who are already struggling with high housing costs and rising inflation. NAHB strongly supported the SALT Marriage Penalty Elimination Act.
But on a procedural vote of 195-227, the House on Feb. 14 rejected legislation that would have temporarily doubled the state and local tax (SALT) deduction limit for married couples.
The SALT Marriage Penalty Elimination Act would have raised for tax year 2023 the cap on the SALT deduction from the current $10,000 limit to $20,000 for the current tax year, for married taxpayers earning less than $500,000 a year. This would have allowed eligible taxpayers who are filing their 2023 tax returns now to immediately claim the expanded benefit.
Using the principle that taxes paid to state and local governments should not be double-taxed as income by the federal government, NAHB supports eliminating the SALT deduction cap entirely. With the failure of this procedural vote, it’s unlikely any further legislation to modify the SALT deduction cap will be considered this year.
Under current law, the $10,000 deduction limit expires after 2025, alongside many other tax provisions that were enacted as part of the 2017 tax reform bill. This deadline will force Congress to re-evaluate those 2017 tax changes next year, including the limit on SALT deductions.
Builders Pulling Back on Price Cuts and Sales Incentives
With mortgage rates now below 7% since mid-December, more builders are cutting back on reducing home prices to boost sales.
In February, 25% of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023. However, the average price reduction in February held steady at 6% for the eighth straight month.
Meanwhile, the use of sales incentives is also diminishing. The share of builders offering some form of incentive dropped to 58% in February, down from 62% in January and the lowest share since last August.
Image: Depositphotos
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