Builder confidence levels increased in January due to a modest drop in interest rates, ending a string of 12 consecutive months of builder sentiment decreases, according to the NAHB/Wells Fargo Housing Market Index (HMI). Builder confidence in the market for newly built single-family homes in January increased by four points to 35, according to the HMI.
Despite the month-over-month increase, builder sentiment remains in “bearish territory” as builders continue to face elevated construction costs, building material supply chain disruptions, and challenging affordability conditions, according to the NAHB.
“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,” says 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.”
Derived from a monthly survey, 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 survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.”
All three HMI indices posted gains for the first time since December 2021. The index gauging current sales conditions in January increased four points to 40, the component charting sales expectations in the next six months increased two points to 37, and the gauge measuring traffic of prospective buyers increased three points to 23.
“While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead,” says 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. Improved housing affordability will increase housing demand, as the nation grapples with a structural housing deficit of 1.5 million units.”
The three-month moving average for the HMI in the West increased one point to 27, dropped four points to 33 in the Northeast, dropped two points to 32 in the Midwest, and remained steady at 36 in the South.