Eight straight months of declines erodes homebuilder confidence

It’s one thing for builder confidence to be low, and quite another for it to be underwater. Yet that’s the way the National Association of Home Builders (NAHB) categorizes current conditions amid rising rates and affordability challenges.

Mortgage Professional America interviewed NAHB’s chief economist, Robert Dietz (pictured), to learn more about the current situation in the housing industry. This week, the NAHB released its monthly assessment labeling confidence among builders as now being underwater after protracted challenges.

“We’ve seen eight straight months now of declines for single family homebuilder confidence,” Dietz said. “We do a 100-point scale and this was the first month in the cycle basically since the COVID spring of 2020 where the index dipped below a break-even level of 50. I think the combination of those eight months of declines, and the buyer traffic number falling to its lowest level since 2014 is all an indication we expect single-family housing starts this year to post their first decline in about 11 years – a first annual drop since 2011. Of course, this is all due to at least a decade low in terms of affordability which is a consequence of higher mortgage rates, and ongoing higher construction costs.”

While many argue whether the economy is in a recession, the NAHB has labeled the housing market, at least, to be enduring such a cycle. “We labeled it a housing recession, and it is the broad swath of housing market indicators that are showing weakness,” Dietz said. “In addition to expecting single-family starts to post a decline this year, existing homes are going to decline this year. It’s a lot of different factors that have built up. If we zero in on the construction cost side, building material costs have posted 15% to 20% year-over-year gains.”

Then there’s those pesky supply-chain issues: “In terms of cost growth, it’s getting longer for materials to arrive and all that has resulted in a smaller amount of housing supply that was available during a market period where demand was super charged due to historically low interest rates that pushed up pricing,” Dietz said. “New home pricing was up almost 40% since the start of COVID and then you combine that with now tighter monetary policy which is yielding higher interest rates and there’s a huge number of buyers who have been priced out of the marketplace.”

He said it was cyclical: “The one sort of counterintuitive thing we’re dealing with is that the weakness we’ve seen in the housing market is short term; it’s a cyclical fact connected to the interest rate cycle. The long-term trend, which is a persistent housing deficit which we think is one million homes – that continues. It’s the mismatch with the amount of building that’s taken place over the last decade and current population need.”

But make no mistake – this is no Great Recession redux, the economist noted: “If we’re thinking about the long-term trends, we probably underbuilt housing by about one million homes between 2010 and 2020 period,” Dietz said. “The cyclical downturn that we are facing right now is not as severe as what the industry faced in the Great Recession because that was a housing downturn, a financial crisis and an economic recession combined into one. You had very significant price declines, and a lot of loose mortgage underwriting that resulted in foreclosures and also resulted in a lot of bankruptcies and homebuilders going out of business. We don’t expect that this time. This is going to be a weakening of single-family starts in the short run. Some local markets will see some price decline as affordability conditions try to adjust to the new normal in terms of the interest rate pattern.”

Given the cyclical nature of such downturns, Dietz offered a glimmer of hope: “The other thing to keep in mind is we’re always looking through in the medium-term and long-term that housing often is the first sector that will weaken as interest rates go up, but it’s also the first sector that will rebound. Ultimately, when the rate of inflation comes down, the Fed can end its tightening cycle, interest rates may fall back a bit, and that will drive demand for housing up – and housing will lead any kind of economic recovery.”

Many would-be homebuyers have all but given up on the dream of homeownership given current conditions that have eroded affordability. But this too shall pass, Dietz suggested while urging those unable to buy homes now to keep saving for a down payment once the market improves.

“The adjustment process that occurs in markets will result in some people pausing their home buying activities,” Dietz said. “As I’ve said, at some point the Fed will begin to ease some of the interest rate tightening it’s doing right now in order to slow the economy to bring inflation down. Now when does that happen? I think we would be looking at late 2023, early 2024 as the time period where you might see some easing occur because the Fed has accomplished its soft landing or brought on a recession in 2023.

“When that happens, interest rates will come down, the buyer pool actively looking to buy a home will go up. And we know in terms of demographic potential that those buyers are there. If you think of the millennials, for example - leading age of 42, a lot of them in their mid- to early 30s, and that’s prime home buying period. The cyclical weakness brought about by increased interest rates will continue through this year, likely into 2023. By the time we get to the second half of next year, we could see the markets back on the road to recovery.”
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So hang in there, would-be homebuyers. Keep saving up for a down payment, for this too shall pass.