Homebuilder sentiment dropped yet again in December, hitting its lowest reading since mid-2012, with the exception of the onset of the COVID-19 pandemic in the spring of 2020. This drop marks one full year of declines in builder confidence, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report, released Monday.
In December, builder confidence in the market for newly built single-family homes fell two points compared to November. The month ended at 31 points — less than half the level it was at six months ago.
The NAHB/HMI report is based on a monthly survey of NAHB members, in which respondents are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the builder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.
“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,” Robert Dietz, the NAHB’s chief economist, said in a statement. “Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations.”
As builders look to improve their sales, 62% reported using incentives, 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% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices,” NAHB chairman Jerry Konter said in a statement. “Only 35% of builders reduced homes prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% 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,” Dietz added.
Three other indices monitored by the NAHB also had varied results in December. The gauge measuring current sales conditions fell to 36, down three points month over month, while the component analyzing sales expectations for the next six months rose four points to a reading of 35. The index that charts traffic of prospective buyers held steady from November at a reading of 20 points.
Regionally, the three-month moving averages for 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.
Another survey, the BTIG/HomeSphere State of the Industry Report, also noted sizable decreases in homebuilder outlook. According to the survey, 71% of builders saw a yearly decrease in sales last month, compared to 16% a year ago. In addition, 69% of builders reported year-over-year declines in traffic in November, while only 7% of respondents saw traffic as better than expected — a record low for the survey.
The BTIG/HomeSphere study is an electronic survey of approximately 50-100 small- to mid-sized homebuilders that sell, on average, 50-100 homes per year throughout the nation. In November the survey had 126 respondents.
“Conditions deteriorated for the third month given higher mortgage rates, fear of falling real estate values and poor confidence among consumers,” BTIG analyst Carl Reichardt said in a statement.
When asked about sale expectations for 2023, 51% of respondents believe new contracts will decrease next year from 2022, while 33% believe new contracts will be up in the new year.