Main takeaways
- Homebuilder sentiment hit its lowest reading since mid-2012, excluding the start of the COVID-19 pandemic in 2020.
- The drop marks one full year of declines in builder confidence for newly built single-family homes.
- December ended at 31 points, less than half the level it was at six months ago.
- Weaker housing conditions are expected to persist in 2023, and a recovery coming in 2024 is forecast.
- Regionally, HMI scores fell in all four regions, dropping to 34 in the Midwest, 36 in the South, 26 in the West and 37 in the Northeast.
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/Wells Fargo Housing Market Index. It is the lowest confidence reading since mid-2012, with the exception of the onset of the pandemic in the spring of 2020, fueled by high mortgage rates, elevated construction costs running well above the inflation rate and flagging consumer demand due to deteriorating affordability conditions.
"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," says NAHB Chief Economist Robert Dietz. "Mortgage rates are down from above seven 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."
Looking ahead
As homebuilders look to improve their sales, nearly two thirds, or 62 percent, reported using incentives to boost sales last month, including providing mortgage rate buydowns, paying points for buyers and offering price reductions. However, builders can only slash prices so much.
"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," says NAHB Chairman Jerry Konter in a statement. "Only 35 percent of builders reduced homes prices in December, edging down from 36 percent in November. The average price reduction was eight percent, up from five percent or six percent earlier in the year."
Looking ahead, Dietz recommended that builders plan one 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."
Other HMI results
Three other indices monitored by the NAHB also had varied results in December. The HMI 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.
Regionally, the three-month moving averages for HMI scores fell in all four regions, dropping to 34 points in the Midwest (four-point drop), 36 points in the South (six-point drop), 26 points in the West (three-point drop), and 37 points in the Northeast (five-point drop).