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The National Association of Home Builders is warning that the new-home market is in a “housing recession”—but says that brighter days are on the horizon. And a turnaround could come sooner than expected given recent uplifting economic data. Until then, though, builders are increasingly turning to incentives—including mortgage rate buydowns and, in some cases, price drops—to bring home buyers back to the market.
During this week’s 2023 International Builders’ Show in Las Vegas, housing economists blamed high construction costs, a sluggish economy and surging mortgage rates for triggering recent dips in new-home sales and construction. Single-family starts declined in 2022 for the first time in 11 years. But a turning point in both the housing market and the overall economy likely will come in the second half of 2023, NAHB economists said during IBS. The National Association of REALTORS® also predicts that existing-home sales will return to more historically normal levels this year.
“With interest rates projected to normalize in the second half of 2023 as the Federal Reserve taps the brakes in its fight against inflation, the pace of single-family construction will bottom out in the first half of 2023 and begin to improve in the latter part of the year,” said NAHB Chief Economist Robert Dietz. “This forward momentum will lead to a calendar year gain for single-family starts in 2024.”
Housing Affordability Remains Big Obstacle
Still, many home buyers are being priced out of the market. A new NAHB survey shows that 65% of buyers actively looking for a home in the fourth quarter of 2022 were unsuccessful in their search for more than three months. Affordability was the most commonly cited reason (45%) they hadn’t bought yet. NAHB’s data shows that only 42% of new- and existing-home sales are currently affordable to a typical household, marking a new low since the Great Recession.
Affordability conditions have deteriorated as mortgage rates more than doubled from a year ago. In that time, more than $700 has been added to the monthly mortgage payment on a typical home. NAHB is forecasting mortgage rates to fall below 6% by 2024, and NAR has predicted they will settle at 5.7% by the end of the year. “Falling rates will set the stage for a housing rebound later in 2023, and a better affordability environment will lead to a recovery of housing demand,” Dietz says.
NAHB also says home prices will likely still need to adjust to higher mortgage rates. The builder’s trade group is forecasting home prices to fall by as much as 15% in 2023, following a nearly 40% increase during the pandemic-fueled homebuying frenzy.
Housing Inventory Woes to Continue
As builders slow construction in response to economic headwinds, economists say that will only worsen current nationwide housing shortages. “Every decade, we’re adding about 20 million more people living in the country, and if we don’t build new homes, one wonders where they will live,” NAR Chief Economist Lawrence Yun recently told NAR’s Real Estate Today.
Builders say labor shortages and ongoing supply chain disruptions, which are delaying electrical transformers, concrete, appliances, and doors and windows, also are contributing to the drop in construction. “We will need 740,000 construction workers annually to account for industry expansion and industry retirements,” Dietz says. “Recruiting, training and retaining skilled workers will be job number one.”
NAHB forecasts that single-family production will decrease to 744,000 units this year before rebounding to a 925,000 annual pace in 2024. Declines in 2022 and those forecasted for 2023 will be more pronounced because production was running at a “very solid level” above a 1.1 million annualized pace through the first quarter of 2022 before a steep decline that coincided with the sudden rise in mortgage rates, NAHB notes in its forecast.
NAHB also is forecasting multifamily construction to drop by 28% this year before stabilizing in 2024. The trade group says that slowing rent growth, rising unemployment, tighter financing conditions and a glut of projects in the pipeline are causing a large backlog of multifamily construction. There are more than 940,000 apartments under construction, the highest total since 1973, according to NAHB.
A nationwide housing deficit remains, given population needs. In the end, that could bode well for housing’s outlook. “Favorable homebuyer demographics and a better interest rate environment will lead to a solid period for home building during the first half of the decade,” NAHB notes in its forecast. “Single-family home building will need to exceed 1.1 million starts per year in order to reduce a deficit that arose because of underbuilding in the prior decade.”