Mortgage rates were a contributing factor that helped provide “solid” gains in builder confidence for the second consecutive month, said officials for the National Association of Homebuilders (NAHB). NAHB views recent improvement as a signal that the housing market may be turning a corner, officials said, even as builders continue to contend with high construction costs and issues with supply of building materials.

Builder confidence in the market for newly built single-family homes in February rose seven points to 42, according to the NAHB/Wells Fargo Housing Market Index (HMI) released yesterday—the strongest reading since September of last year.

“With the largest monthly increase for builder sentiment since June 2013, excluding the period immediately after the onset of the pandemic, the HMI indicates that incremental gains for housing affordability have the ability to price in buyers to the market,” said NAHB chairperson Alicia Huey, a custom home builder and developer from Birmingham, Ala. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing. However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall.”

The average 30-year fixed-rate mortgage peaked at 7.08% in October, according to Freddie Mac. Although rates declined to approximately 6.1% at the start of February, the 10-year Treasury rate has moved up more than 30 basis points during the past two weeks, indicating an increase for mortgage rates may lie ahead.

“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” said NAHB chief economist Robert Dietz. “Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle. And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024.”

Builders continue to offer a variety of incentives to attract buyers during this housing downturn, NAHB officials said, but recent data indicate that the housing market is showing signs of stabilizing off a cyclical low. For example, 31% of builders reduced home prices in February; fewer than the 35% that offered reduced prices in December and the 36% in November.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

All three HMI indices posted gains for the second consecutive month. The HMI index gauging current sales conditions in February rose six points to 46. The component charting sales expectations in the next six months increased 11 points to 48. The gauge measuring traffic of prospective buyers increased six points to 29.