Builder Confidence Declined Every Month This Year

Builder confidence slumped every month this year as inflation rose and demand for new residential housing lagged, according to the latest data from the National Association of Home Builders and Wells Fargo.

In December, builder confidence in the market for newly built single-family homes registered its twelfth consecutive decline, dropping two points to 31 and marking the lowest such reading since mid-2012 and the onset of the COVID-19 pandemic in early 2020. Any number over 50 indicates that more builders view conditions as good than poor.

Regionally, 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.

“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 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.”

NAHB Chief Economist Robert Dietz says the organization is expecting weaker housing conditions to continue into next year but predicts a recovery the following year, thanks to an existing national housing deficit of 1.5 million units and the expectation of lower mortgage rates if the Fed eases monetary policy in 2024.

“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,” Dietz said. “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.”

In October, Dietz noted that while he hasn’t seen reports of job layoffs in construction yet, they could be on the horizon. He told an audience of professionals at the National Association of Real Estate Editors annual conference in Atlanta that the industry’s greatest challenge will be hiring to replace those workers who are “aging out.”

In addition, Dietz revealed that roughly 5% to 6% of new single-family homes built are being occupied by renters, while 5% to 6% are bought by investors and converted to single-family rentals.

“Historically, this has been about 3% of the single-family home sector, but now it’s about one in 10 homes, and maybe more, and the number is forecast to increase,” he said.