NAHB Reflects a Weakening Housing Market in 2022 – Dec 2022/Jan 2023

Rising interest rates precedes higher mortgage rates which slows and softens housing market. Add inflation which fuels elevated construction costs. You have deteriorating demand due to declining affordability which has dragged builder sentiment DOWN all of 2022.

Builder confidence for newly built single-family homes posted its 12th straight monthly decline this month (December 22). Now dropping 2 more points to 31 per NAHB. This is the lowest confidence reading since mid-2012 excluding the pandemic.

“In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions. But with construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices. Only 35% of builders reduced home prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.”

However, we are witnessing that FEWER builders are reducing home prices with the average price reduction at 8%, up from 5% or 6% earlier in the year. Apparently, this is a very slow process with no side near the point of compromising that much. How much longer will this last? Will builders be forced to reduce prices and severely cut into their margins to sell their homes?

The good news is that this month was the smallest drop in the index for the past 6 months so we may be nearing a bottom of the cycle for builder sentiment. Although a bottom does not equate to a fast reversal back up. Mortgage rates are down from being over 7% so builders are forecasting an increase in future sales expectations.

NAHB Chief Economist Robert Dietz added, “NAHB is expecting weaker housing conditions to persist in 2023, and we forecast a recovery coming in 2024, given the existing nationwide housing deficit of 1.5 million units and future, lower mortgage rates anticipated with the Fed easing monetary policy in 2024.”

Therefore, 2023 appears to bring more challenges before we recover which many economists believe will most likely take place in 2024.

Data source: NAHB/Wells Fargo HMI