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High mortgage rates, elevated construction costs, and falling consumer demand due to deteriorating affordability conditions have dragged down builder sentiment every month in 2022. Builder confidence in the market for newly built single-family homes posted its 12th consecutive monthly decline in December, dropping two points from November to 31, according to the NAHB/Wells Fargo Housing Market Index (HMI).

NAHB says the December reading is the lowest confidence reading since mid-2012, with the exception of the onset of the pandemic in spring 2020.

“In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers,” says NAHB chairman Jerry Konter. “Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buydowns, paying points for buyers, and offering price reductions.”

Konter says with construction costs up more than 30% since the beginning of the year, “there is little room for builders to cut prices.” Thirty-five percent of builders reduced home prices in December, slightly lower than 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.

“The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment,” says NAHB chief economist Robert Dietz. “Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and, for the first time since April, builders registered an increase in future sales expectations.”

Dietz says builders still need to plan a year or more out when thinking about land and construction timelines. The NAHB is expecting weaker housing conditions to persist in 2023 and is forecasting a recovery in 2024.

The NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” The HMI survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” The HMI index gauging current sales conditions fell three points to 36, and traffic of prospective buyers held steady at 20. The component charting sales expectations in the next six months increased four points to 35.

The three-month moving average HMI fell five points to 37 in the Northeast, dropped four points to 34 in the Midwest, decreased six points to 36 in the South, and fell three points to 26 in the West.