Why are homebuilders more optimistic?

The phone has been ringing at Moontower Design and Build, a custom home builder in Austin, Texas. Architect and sales director Maggie McIntosh said she’s hearing from potential customers anticipating a drop in mortgage rates. 

“I think people are saying, like, ‘OK, I maybe couldn’t stomach 7%, you know, 6% is uncomfortable. But 5% looks pretty good,'” she said.

That prospective dip in mortgage rates is likely part of why homebuilder confidence is the highest it’s been in four months, according to an index out this week from the National Association of Home Builders. On Friday, the Census Bureau will release data on how much new residential construction kicked off in the U.S. last month, showing how much of that confidence translated into new housing starts.

Moontower’s McIntosh also noted that potential customers are willing to spend more money, because money is cheaper since the Federal Reserve started cutting the federal funds rate. That rate dropping also means builders will pay less interest on their loans too.

Building a house often means buying land, sometimes connecting it with sewer, building sidewalks and paying for building materials like lumber and steel, according to Robert Dietz, chief economist at the National Association of Home Builders. Oh, and that’s along with the cost of worker laborer to put it all together.

“Typically, all of that has to be financed up front before the home is purchased,” Dietz said.

Dietz added that he expects that increased confidence among builders to translate into real new inventory on the market in five to six months.