Builders started off the year with renewed confidence for new home construction, despite a full year of declining sentiment in 2022.
The National Association of Home Builders (NAHB) found that builder confidence in the new single-family home market improved for the first time in January due to lower interest rate expectations in 2023.
“A modest drop in interest rates helped to end a string of 12 straight monthly declines in builder confidence levels,” NAHB said in its monthly report released Wednesday.
However, it also said that sentiment continues to remain in “bearish territory” due to elevated construction costs, supply chain disruptions, and challenging affordability conditions.
“While NAHB is forecasting a decline for single-family home starts this year compared to 2022, it appears a turning point for housing lies ahead,” said NAHB Chief Economist Robert Dietz. “In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability.”
Builder confidence rose by four points in January, increasing from 31 to 35, according to the NAHB/Wells Fargo Housing Market Index (HMI).
The NAHB/Wells Fargo HMI derives its data from monthly surveys that track builders’ perceptions in three categories: current home sales, six-month sales expectations, and the traffic of prospective buyers. Results of the HMI are classified as either “good,” “fair,” or “poor,” with any number over 50 indicating that more builders view conditions as good than poor.
According to the report, all three HMI indexes posted gains for the first time since December 2021. In January, the HMI index tracking current home sales rose by four points to 40, the component charting six-month sales expectations increased by two points to 37, and the index measuring the traffic of prospective buyers rose by three points to 23.
While 35 is still below the baseline score for “good,” the uptick signals a positive shift in sentiment.
“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,” said NAHB Chairman Jerry Konter. “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.”
A three-month moving average for regional HMI scores shows the West registered a one-point gain to 27, the South held steady at 36, the Northeast fell four points to 33, and the Midwest dropped two points to 32.
HMI tables can be found at nahb.org/hmi.