Homebuilder sentiment increased for the first time in over a year, yet still remains low. After declining for 12 straight months, sentiment increased by 4 points in January to 35 (out of 100) on the National Association of Home Builders (NAHB) Housing Market Index. NAHB considers sentiment below 50 as low.
Jerry Konter, NAHB chairman, explained that homebuilder sentiment will likely continue increasing in the coming months or at least stay above December lows.
“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,” according to Konter.
High-interest rates, elevated home prices, and expensive construction costs significantly impact the lagging sentiment. However, mortgage rates slightly decreased in the past month, generating higher mortgage demand and making some homebuilders and buyers more optimistic.
Housing Starts Decline Amid Low Sentiment
NAHB recently reported that housing starts decreased by 1.4% in December, but single-family housing production increased by double digits. Lackluster multifamily construction is what kept overall housing starts in the negative. On a seasonally adjusted basis, the United States constructed 1.38 million housing units from December 2021 to December 2022.
Housing starts are down annually, with single-family starts declining 25% and multifamily starts falling 19% compared to the previous year. According to NAHB, housing construction may also continue to decline during most of 2023. Lagging construction activity directly results from high-interest rates, which have reduced homebuying demand and made constructing homes more expensive. Simultaneously, low construction rates keep supply low, keeping housing prices high.
“Even though single-family starts are up on a monthly basis, permits indicate that the housing market will slow down further in 2023,” said Konter, “we expect a sustainable decline for mortgage rates in the second half of this year, which should lead to a housing recovery in 2024.”
There are many challenges affecting the housing market, but Konter says that rising homebuilder sentiment is a positive sign for the market’s future. “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”, according to Konter.
America’s Housing Shortage Will Continue
Last year, RealtyHop noted that low housing production significantly contributes to America’s housing shortage. According to Robert Dietz, Chief Economist at NAHB, the United States has a structural housing deficit of 1.5 million units. Home building will likely remain slow for most of 2023 and will probably only bounce back when mortgage rates drop even further. Unfortunately, experts predict that rates will stay above 6.0% through at least the end of the year, squashing any realistic hope that borrowing rates will decline in the near future.