Housing Market Recession: Home Builder Sentiment Tanked Every Month This Year—But There's Finally A 'Silver Lining'

Topline

Home builder confidence plunged every single month this year as higher interest rates weakened demand in the formerly booming housing market, the National Association of Home Builders reported Monday, but with the Federal Reserve finally starting to slow down on its aggressive interest rate hikes, economists think the end of the collapse could be in sight—even if a full-blown recovery isn’t.

The housing market collapse may soon end, but one economist notes a “meaningful recovery is still a … [+] long way off” because prices have “much further room to fall.”

Key Facts

Builder confidence in the market for new homes posted its 12th-straight monthly decline in December, dropping 2 points to 31—down from 84 points one year ago and hitting the lowest lowest level since 2012, excluding a historic plunge at the start of the pandemic, according to the NAHB/Wells Fargo Housing Market Index released Monday.

The association called the ongoing collapse a byproduct of high inflation and high mortgage rates, which have made homes less affordable and deterred demand from prospective home buyers—forcing some 62% of builders to use incentives (such as price reductions and mortgage rate buy-downs) to bolster sales.

The worse-than-expected report also showed 35% of builders reduced prices by an average of 8% in December, up from 5% earlier in the year.

In a statement, NAHB chief economist Robert Dietz said he expects weaker housing conditions to persist next year before a recovery in 2024, as the Fed reverses its aggressive monetary policy of this year; however, he also outlined a “silver lining” in the report.

Dietz notes this month’s drop in the index marks the smallest decline in the past six months—a sign builder sentiment could soon start to fall—and for the first time since April, builders now expect future sales will actually increase, thanks in part to mortgage rates falling to 6.3% from a peak above 7% in recent weeks.

In emailed comments, Pantheon Macro senior economist Kieran Clancy agreed that the rise in expected sales signals home sales may soon stop falling, as quickly as the first quarter, but he cautioned a “meaningful recovery is still a long way off,” noting home prices have “much further to fall” as higher interest rates linger in the coming quarters.

Key Background

The housing market has suffered from dwindling demand as the Fed’s interest rate hikes drive up mortgage rates—and the cost of homebuying. According to the National Association of Realtors, existing-home sales in October fell for the ninth consecutive month to an annual rate of 4.4 million. Ushering in the declines, the average rate on the popular 30-year fixed mortgage has more than doubled over the past year, according to Freddie Mac.

Crucial Quote

“The Fed slowing down their rate hikes will send a signal that we are close to the bottom,” says Tejas Joshi, a director at investment firm Yieldstreet. “Expect that to happen by summer 2023.”

What To Watch For

The home builder release kicks off a busy week for new data on the housing market. On Tuesday, the Census Department is slated to release its monthly report on housing starts, and the National Association of Realtors on Wednesday will report existing home sales for last month.

Tangent

The median sales price of homes sold in the U.S. hit a record $454,900 in the third quarter, up from $411,200 one year earlier, according to the Census Bureau.

Housing Market Recession: Home Builder Sentiment Tanked Every Month This Year—But There’s Finally A ‘Silver Lining’