After a year of declining confidence, what's ahead for builders?
The National Association of Home Builders’ survey showed confidence dropped for the 12th straight month in December, but things may be leveling out.
Key points:
- Supply chain issues, rising interest rates and slower sales combined to knock down confidence levels throughout 2022.
- Confidence levels in the South dropped the most among U.S. regions.
- December's decline was smaller than previous drops, suggesting that confidence could be reaching its bottom.
Home builders were in a bearish mood throughout 2022, but the outlook for the year ahead may be improving.
The National Association of Home Builders' monthly survey showed builder confidence was down again in December, marking an unwelcome milestone: Confidence levels dropped every month in 2022 as rising interest rates, supply chain issues and a slowdown in the real estate market created a cascade of challenges as the year wore on.
Builder confidence fell to 31 in December, the lowest reading since mid-2012, apart from a brief period at the onset of the pandemic, said Robert Dietz, chief economist for NAHB. The highest level in the past decade was in November 2020, when confidence peaked at 90 as lockdowns eased and home sales were on an upward trajectory.
Despite a year of declining confidence, Dietz noted that the numbers in the December report reflect the smallest drop in the past six months — meaning builder sentiment could be bottoming out. He noted that for the first time since April, builders predicted an increase in future sales.
The survey also found 62% of builders are using incentives to sell homes, including mortgage rate buydowns and price reductions. However, rising construction costs are making it difficult to cut home prices: Only 35% of builders dropped home prices in December, which is slightly less than in November.
The average price reduction was 8%, up from 5% earlier this year, according to Dietz.
While the erosion in confidence is slowing, the NAHB is expecting weaker housing conditions to persist in 2023 with a recovery coming in 2024. Aiding in the eventual recovery is the existing housing deficit of 1.5 million units and the Fed's easing of monetary policy.
In a recent interview, Dietz said that while custom homes and remodeling have shown strength, single-family and apartment permits/starts have slowed significantly, adding to the expectation that 2023 will be weak. However, conditions are not anything like they were during the Great Recession, which followed years of overbuilding.
Broken down by regions, the three-month moving averages showed builders in the West had the lowest levels of confidence, dropping three points to 26. The Northeast fell five points to 37, the Midwest dropped four points to 34 and the South fell six points to 36.