Homebuilder Sentiment at 12-Month Low Amid Market Uncertainty

Amidst a Federal Reserve shift and moderated inflation rates, housing costs surge, intensifying an affordability crisis. Despite recent drops in mortgage rates, they remain high, fueling a persistently cautious sentiment among homebuilders.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) tumbled by six points to 34 last month, marking the fourth straight month of decline and hitting its lowest level since December 2022, plummeting by 22 points in five months.

Escalating inflation inflated construction and financing expenses, tightening the housing supply. Elevated short-term interest rates further burdened homebuilders and land developers, compounding the challenge in a market with limited resale inventory.

As supply remains restricted, a significant portion of potential homebuyers find themselves priced out, compelling homebuilders to slash prices to stimulate sales. In November, 36% of builders aimed to reduce home prices, with 60% offering incentives, resulting in an average 6% price cut.

Forecasts anticipate the Federal Reserve to maintain a dovish stance until 2024, prompting homebuilders to cautiously anticipate easing inflation, which might boost demand.

Robert Dietz, chief economist at the National Association of Home Builders, observed, “Recent macroeconomic data point to improving conditions for home construction in the coming months,” suggesting potential improved market views by December due to lowered mortgage rates and heightened housing demand amid scarce inventory.

Projections suggest a 5% rise in single-family starts by 2024 as inflation eases, while consumer sentiment forecasts a 3.1% inflation rate within a year, the lowest since March 2021, down from 4.5% in November.

Chicago Fed President Austan Goolsbee notes “slow but clear progress” in the Fed’s anti-inflation efforts, with a 3.2% year-over-year rise in the consumer price index in October.

This landscape has spurred cautious optimism among homebuilders, fueled by signals indicating imminent interest rate declines.

Morgan Stanley’s Ellen Zentner predicts an upturn in homebuilder activity in the next year, alleviating supply shortages. With decreasing inventory and mortgage rates, home prices are expected to modestly decline, leading to improved affordability by 2025 and potentially boosting existing home sales.