How and When Will Housing Rebound?

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

Housing data for the end of 2022 illustrate a market continuing to weaken because of low housing affordability, largely as a result of elevated mortgage interest rates. At the start of 2023, the average 30-year fixed mortgage rate is near 6.5%, down from a near 20-year high of 7.1% in early November.

However, forecasters expect the Federal Reserve will end its path of rate increases at the end of the first quarter. This should lead to sustainable declines for mortgage rates in the second half of 2023 and into 2024, enough to spur a rebound for single-family construction.

And more construction is needed over the long term: A new NAHB study estimates the housing market is underbuilt by 1.5 million homes. However, rising mortgage rates combined with 35% to 45% growth in home prices since 2020 have priced many prospective buyers out of the market. Indeed, according to new NAHB estimates, 18 million households were priced out of the market as rates increased from 3% to 7% throughout 2022.

The decline in affordability is clearly reflected in current housing sales statistics: The volume of existing home sales in November 2022 was 35% lower than a year prior, while inventory was at just a 3.3-month supply. New home sales, per Census data, were down 15% in November on a year-to-date basis when compared against the same time period of 2021. Inventory is elevated at an 8.6-month supply, as builders report growing cancellation rates (30% on average) and declining buyer traffic.

As a result of these market developments, single-family builder sentiment — as measured by the NAHB/Wells Fargo Housing Market Index (HMI) — declined every single month of 2022, falling from 83 in December 2021 to 31 in December 2022. This is the lowest reading since 2012, with the exception of the spring of 2020. In fact, nearly two-thirds (62%) of builders are using some form of sales incentive to sell homes, with 35% reporting they cut prices.

The steep decline in the HMI points to additional reductions in the pace of housing starts. In November, single-family starts decreased 4.1% and had dropped 9.4% year to date. Meanwhile, multifamily permits decreased 16.4% to an annualized 561,000 pace, the lowest reading for apartment permits since September 2021. NAHB is forecasting declines for apartment construction in 2023 due to the large amount of supply in the construction pipeline, as well as tightening commercial real estate finance conditions.

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