The year begins with an increase in builder confidence as mortgage rates fell well below 7% over the last month, according to a report from the National Association of Home Builders.

In fact, builder confidence for newly built single-family homes climbed to 44 in January, up seven points. This marks the second consecutive monthly increase in builder confidence. This increase is closely tied to falling interest rates., according to the NAHB Wells Fargo Housing Market Index (HMI).

“Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” said Alicia Huey, NAHB chairman and custom home builder and developer from Birmingham, Ala.

According to Huey, single-family starts are expected to grow this year. However, there will be challenges. Namely, building material cost and availability, and lot supply are expected to be troublesome.

“Mortgage rates have decreased by more than 110 basis points since late October per Freddie Mac, lifting the future sales expectation component in the HMI into positive territory for the first time since August,” said NAHB chief economist, Robert Dietz. However, Dietz echoes Huey’s statement regarding supply-side challenges in the form of higher prices and/or shortages.

Many builders continue to reduce home prices to boost sales, even as mortgage rates have fallen. In January, 31% of builders reported cutting home prices. This was down from 36% during the previous two months. It was also the lowest rate since last August.

The average price reduction in January remained at 6%, unchanged from the previous month. However, 62% of builders reported providing sales incentives in January.

For over 35 years, NAHB has been conducting a monthly survey. This survey records information collected from builders and gauges their assessments of current single-family home sales and sales expectations for the next six months. Based on scores for individual components of this survey, a seasonally adjusted index is calculated. Any number over 50 indicates more builders view conditions as good than poor.

Based on the results of this survey, there were reported gains in January. The HMI index charting current sales conditions increased seven points to 48; the component measuring sales expectations in the next six months increased 12 points to 57; and the component judging traffic of prospective buyers rose five points to 29.

On a regional basis, the Northeast increased four points to 55, the South increased two points to 41, the West reported a one-point increase to 32, and the Midwest held at 34. These scores were assessed based on three-month moving averages for HMI scores.