Don’t count on a housing rebound anytime soon in 2023 as data for the housing market remains firmly in recession territory.
A housing market index put together by the National Association of Homebuilders and Wells Fargo started out at 83 at the beginning of this year and steadily dropped every month until it hit 31 in December. This is the lowest confidence reading since mid-2012 with the exception of spring 2020.
Homebuilder sentiment is a closely watched indicator of whether builders will try to build more or fewer
The US is short millions of housing units for its population because of the housing-induced Great Financial Crisis of 2008. As such, future dents to the housing market can significantly increase the cost of housing and the amount of homelessness in the long term.
In a high inflation and high mortgage rate environment, builders are struggling to make a financial case to build. Appliances and home furnishings remain hot because supply chains for those items remain difficult, and the overall result is fewer houses being built and lower housing inventory in the long run.
Homebuilders are trying to offer cheaper houses to get people to buy, but construction prices have gone up 30% in 2022. These costs aren’t something the Fed’s interest rate hikes directly affect.
Lumber inflation has cooled off significantly from its peak, but shortages for other materials are still making it difficult to build, said Robert Dietz, chief economist at the National Association of Home Builders, in an email. A third of respondents to the NAHB survey said they’re struggling to obtain electrical transformers, which can be a “showstopper” in residential construction.
“The combination of declines for home building and future declines for apartment construction in 2023, combined with home price declines, indicates the U.S. economy will experience a hard landing in 2023 due to the tightening of monetary policy by the Fed,” Dietz said. “That hard landing will involve future quarters of negative GDP growth and rising unemployment.”
The bright spot in the December report is that it’s been the smallest drop in homebuilder sentiment all year. This means the housing market could be stabilizing as mortgage rates fall back below 7%, and the economy could rebound after this year.
“The seeds of a rebound can be found,” Dietz said. “For example, the housing market is short by 1.5 million residences relative to current population trends. When rates sustainably move lower later in 2023, single-family home building will help lead an economy rebound. We are forecasting gains for single-family construction for calendar year 2024.”