High mortgage rates, elevated construction costs running well above the inflation rate and flagging consumer demand due to deteriorating affordability conditions have dragged builder sentiment down every month in 2022.
Builder confidence in the market for newly built single-family homes posted its 12th straight monthly decline in December, dropping two points to 31, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the lowest confidence reading since mid-2012, with the exception of the onset of the pandemic in the spring of 2020.
“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 percent 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 percent since inflation began to take off at the beginning of the year, there is little room for builders to cut prices. Only 35 percent of builders reduced homes prices in December, edging down from 36 percent in November. The average price reduction was 8 percent, up from 5 percent or 6 percent earlier in the year.”
“The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment,” said NAHB Chief Economist Robert Dietz. “Mortgage rates are down from above 7 percent in recent weeks to about 6.3 percent today, and for the first time since April, builders registered an increase in future sales expectations.”
Dietz added that in this tenuous economic climate, builders still need to plan a year or more out when thinking about land and construction timelines.
“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.”
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.
The HMI index gauging current sales conditions fell three points to 36 and traffic of prospective buyers held steady at 20. The component charting sales expectations in the next six months increased four points to 35.
Looking at the three-month moving averages for regional HMI scores, the Northeast fell five points to 37, the Midwest dropped four points to 34, the South fell six points to 36 and the West posted a three-point decline to 26.