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Builder’s Index Tracks New-Home Slowdown

NAHB’s monthly survey of builders’ attitudes recorded higher pessimism every month in 2022. The Dec. reading was down 2 points to 31, the lowest reading since 2012.

WASHINGTON – 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 (NAHB)/Wells Fargo Housing Market Index (HMI).

It’s the lowest confidence reading since mid-2012, with the exception of the onset of the pandemic in the spring of 2020. The index goes as high as 100 with 50 representing a relative balance between optimism and pessimism about the market.

“In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for homebuyers,” says NAHB Chairman Jerry Konter.

“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,” says Konter. “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 there’s a small silver lining in the latest report: “It’s 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,” he says. “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.”

Builders still need to plan a year or more out when thinking about land and construction timelines, however, and it’s not yet clear how they’ll make decisions over the near term.

“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,” says Dietz.

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.

The HMI index 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.

Looking at the three-month moving averages for regional HMI scores, 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.

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