Is This a Positive Sign for the Housing Market?

It’s a small uptick, but an uptick it is.

According to the National Association of Home Builders/Wells Fargo monthly Housing Market Index, builder confidence in the market for newly-built single-family homes in January rose 4 points to 35.

The increase ends the previous 12 straight months of declines in builder confidence during 2022.

Housing Market Confidence Increasing

NAHB leaders feel that the uptick could be an encouraging sign that a turning point for the housing market is on the way. Not right away, but on the horizon, and assisted by the modest decrease in interest rates.

Still, builders are struggling with three key challenges:

Elevated construction costs
Building material supply chain disruptions
Challenging affordability conditions.

“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, a home builder and developer from Savannah, Ga. “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.”

Continued Decrease in Mortgage Rates Will Help

NAHB Chief Economist Robert Dietz said that mortgage rates are expected to “trend lower” which will help new housing be more affordable.

“While NAHB is forecasting a decline for single-family 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.

And, Dietz pointed out, the US “grapples with a structural housing deficit of 1.5 million units.” As mortgage rates decline, demand for new housing should be strong.

Stats from the Housing Market Index

The 35% NAHB/Wells Fargo Housing Market Index for January is an average of three components of the membership survey. Here’s how the components broke down:

Builder Confidence in the sale of new single-family homes at the present time, 40%
Builder Confidence in the sale of new single-family homes in the next 6 months, 37%
Builder Confidence in the traffic of prospective buyers/clients, 23%.

Although the January 35% rating overall is an uptick, it’s still a long way for the highest builder confidence rating during 2022, which was 83% in January.

The regional averages, using those same three components, were:

Northeast 34%
Midwest 32%
South 39%
West 29%

How the Housing Market Index Is Calculated

Derived from a monthly survey that NAHB has been conducting for more than 35 years, 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.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

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This article, "Is This a Positive Sign for the Housing Market?" was first published on Small Business Trends