Despite slight uptick, builder confidence remains low
Home builder sentiment increased after 12 straight months of declines following a slight drop in interest rates, the National Association of Home Builders (NAHB) reported.
But despite the slight rise, overall confidence levels remain low as builders continue to combat elevated construction costs, limited housing affordability, and ongoing supply chain disruptions.
Builder confidence in the market for newly-built single-family homes in January rose four points to 35, according to the NAHB/Wells Fargo Housing Market Index (HMI) released this morning.
“It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”
All three HMI indices posted gains for the first time since December 2021.
The HMI index gauging current sales conditions in January rose four points to 40, the component charting sales expectations in the next six months increased two points to 37 and the gauge measuring traffic of prospective buyers increased three points to 23.
“While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead,” said NAHB Chief Economist Robert Dietz. “In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability. Improved housing affordability will increase housing demand, as the nation grapples with a structural housing deficit of 1.5 million units.”
In late November, Dietz delivered an economic outlook for 2023 and said he expects housing starts to see a significant decrease this year.
Dietz told HBSDealer that he will provide a more precise forecast for housing at the upcoming International Builders Show in Las Vegas.
Looking at the three-month moving averages for regional HMI scores, the West registered a one-point gain to 27, the South held steady at 36, the Northeast fell four points to 33 and the Midwest dropped two points to 32.
The 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. HMI tables can be found at nahb.org/hmi. More information on housing statistics is also available at Housing Economics PLUS.
The latest builder confidence level was confirmed by the most recent HomeSphere/BTIG survey.
About 71% of builders reported year-over-year (YOY) decreases in sales for December 2022 with 70% seeing a decline in home buyer traffic in the most recent survey. But 11% said sales were better than expected compared to 10% in November 2022. Additionally, 35% of builders said sales were worse In December than expected compared to 50% in the prior month.
“Conditions continue to be very slow given higher mortgage rates, fear of falling real estate values and weak confidence among consumers,” said BTIG analyst Carl Reichardt,
According to BTIG, home builders are re-adjusting their business plans and lowering their own expectations as they look ahead this year.
Other findings from the latest Homesphere/BTIG survey include:
- Sales and traffic trends are still soft: Only 7% of builders reported higher YOY sales vs. 42% in December 2021 and 71% saw a YOY decrease in orders vs. 71% last month and 25% in December 2021. Just 10% reported an increase in YOY traffic vs. 8% last month. 70% saw a decline, compared to 69% last month.
- Builders continue to cut base prices and use incentives: The number of builders raising prices picked up slightly - 19% of builders raised some, most, or all base prices in December, from 15% last month. 29% cut some, most or all base prices vs. 39% last month. Incentive use remained elevated as 41% of builders reported increasing some, most or all incentives vs. 40% last month.
The Monthly New Residential Construction report for December 2022 will be released on Jan. 19 by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
