The Federal Reserve hammered both sides of the housing market in 2022. Rising mortgage rates kept home purchases out of reach for many, while higher building costs made it difficult for sellers to reduce the prices of new homes.
The National Association of Homebuilders (NAHB) declared a recession in the housing market in August. (Industries can experience recessions while the broader economy is not in a recession).
NAHB chief economist Robert Dietz cites the data supporting that call: existing house sales, mortgage applications, and single-family starts are each down by a third year-over-year. “We’re seeing decade-low readings for just about every index that you can imagine for housing,” Dietz says.
Normally this would lead to a crash in prices. But in 2023, with the market not yet recovered from two years of supply chain delays? Prepare for something less traditional.
Home prices are going to keep going up in 2023
According to the NAHB, construction expenses have increased 35% since covid, while mortgage rates have doubled. High costs and interest rates have left homebuilders with fewer purchasers and more expenses.
Some builders have been able to offer discounts on home prices because of the profits they were raking in at the height of the market. The John Burns Real Estate Consulting Group, which tracks earnings for builders, found that their 2022 margins were 27.3% and 28% in the third and second quarters respectively, says Eric Finnigan, director of building products at John Burns. In a normal year, these margins average 20% or 21%.
Builders sold at unusually high prices early in the pandemic due to great demand and low supply. And many builders wouldn’t price homes before they were ready to sell them, because the volatile prices of materials made them unsure about what price to charge, Finnigan said.
According to NAHB survey data, a third of builders have been decreasing their prices in response to decreased demand, with an average 8% cut. But most builders are boosting or maintaining their prices.
“Sellers were having a hard time coming to terms with how quickly the housing market changed,” says Ali Wolf, chief economist at the housing market research firm Zonda. “That slowdown has persisted for six months in many markets across the country. There still are a lot of consumers that want to own a home but are not willing to buy.”
What’s more common than cutting home prices right now is buyer incentives like offering a mortgage rate buydown, in which the borrower pays more money up front to get a lower interest rate, Dietz says.
This may be why Realtor.com still expects the median home price to move up by 5.4% next year on an annual basis—or why Zillow expects average home prices to decline by only 1% in 2023.
Apartment construction will slow in 2023
Often, the Federal Reserve frames its interest rate hikes as a way to decrease demand to align it with supply. But interest rate hikes lower both demand and supply for new homes, with financing costs going up for not only mortgages but also the loans required to develop plots of land for new construction.
When single-family housing starts fell throughout 2022, apartment construction was a bright spot for the construction industry. But as financial conditions tighten further, the labor market loosens, and rents decline, builders are going to become more wary of multi-family projects, too, Dietz says.
What will the building industry prioritize then? Dietz says remodeling will likely dominate the industry, as well as single-family homes built for rent, which made up 3% of the homebuilding market in 2019 and now make up 12%, as many families still need homes but can’t afford to buy one.
Supply chain snags still aren’t going away
One of the biggest stories in 2022 for the US economy was that most of the finance world underestimated how difficult it would be for global supply chains to bounce back from the shutdowns of 2020 and 2021.
In December 2021, 90% of builders were telling Zonda that they were experiencing supply disruptions, Wolf says. In December 2022, that number fell to 48%.
“We’re nowhere near pre-pandemic levels, but we’re past the worst point of supply challenges,” Wolf said.
While the price of lumber first skyrocketed and then cooled in 2021, the price of other housing materials increased. Builders struggled to find everything else that a home needs, including the kitchen sink. A third of survey respondents recently told the NAHB that they’re currently experiencing shortages of electrical transformers. Builders told John Burns that windows and appliances are backed up as well, says Finnigan.
“I think we’ll see gradual improvement over 2023” as supply chains strengthen, Finnigan says. “I don’t know if it will be anything close to normal, though.”
Slow and steady improvement in mortgage rates
Mortgage rates started to get better for buyers around five or six weeks ago, but likely won’t drop below 5% in 2023, says Zillow economist Jeff Tucker.
Zillow’s statistics on pending home sales also turned a corner. The number of homes with offers made and accepted was down 32% year-over-year in November, versus a decline of 38.3% in the previous month.
“The trajectory won’t look like a V-shaped recovery but the momentum is no longer pointing in a consistently worse direction,” Tucker says.
Biden’s infrastructure bill may save construction in 2023
The effects of a prolonged housing recession are going to damage the construction industry’s ability to produce more homes in the long run. Already, 18% of homebuilders are telling Zonda that they’re laying off employees, even while the overall construction industry is still adding jobs, Wolf saiys
Spending from the Bipartisan Infrastructure Law will start coming into the economy in 2023, with the biggest employment effects coming in 2024 and 2025, notes Mark Zandi, chief economist at Moody’s Analytics. At its peak, spending from the bill will add 800,000 jobs in construction, manufacturing, and transportation to the economy, according to Moody’s estimates.
“It makes it less likely that we go into a [broad] recession,” Zandi said. “We will be most vulnerable in the second half of 2023, and if we do go into a recession this will make it shorter and less severe.”