12 Months of Declining Homebuilder Sentiment Suggests an Approaching Bottom

In December, homebuilders had a less optimistic outlook on their business, but they are beginning to spot signs of potential growth.

In December, the sentiment of builders in the single-family housing market decreased by two points to 31 on the National Association of Home Builders/Wells Fargo Housing Market Index. A score below 50 is considered to be a negative outlook.

The index has been decreasing for the past 12 months, reaching its lowest point since mid-2012, with the exception of a brief dip at the beginning of the Covid pandemic. In December of 2020, the index was at 84.

According to Robert Dietz, the chief economist of the NAHB, the most recent HMI report is a positive sign as it is the smallest decrease in the index in the past six months. This could mean that the builder sentiment is close to the bottom of the cycle. Additionally, mortgage rates have dropped from 7% to 6.3%, and for the first time since April, builders have reported an increase in future sales expectations.

The index had three components, and current sales conditions dropped 3 points to 36, while buyer traffic stayed the same at 20. However, sales expectations for the next six months rose 4 points to 35.The sentiment was most positive in the Northeast and least positive in the West, where prices are the most expensive.

The National Association of Home Builders (NAHB) has attributed the decrease in affordability to the high mortgage rates, which have not dropped significantly since last year. These rates are still approximately double what they were in the past.

NAHB Chairman Jerry Konter, a builder and developer from Savannah, Georgia, noted that in the current economic climate of high inflation and mortgage rates, builders are having difficulty making housing accessible to home buyers. According to the latest survey, 62% of builders are utilizing incentives to increase sales, such as providing mortgage rate buy-downs, paying points for buyers, and offering price reductions.

Konter pointed out that construction costs have risen more than 30% since the start of 2020, making it difficult for builders to lower prices. In December, 35% of builders decreased their home prices, a decrease from the 36% in November. The average price reduction was 8%, which is higher than the 5% to 6% seen earlier in the year.

According to Dietz, the National Association of Home Builders is expecting the current housing conditions to remain weak through 2023. However, they anticipate a recovery in 2024 due to the current nationwide housing deficit of 1.5 million units and the expected lower mortgage rates that will come with the Federal Reserve's easing of monetary policy in 2024.