Builder confidence in the market for newly built single-family homes snapped its longest losing streak last week, rising four points for the month of January, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The rebound follows 12 straight months of decline through December 2022 and the first real decrease since 2011, says Danushka Nanayakkara Skillington, associate vice president of forecasting and analysis for the National Association of Home Builders (NAHB).

The index gauges builder perceptions of current single-family sales and sales expectations for the next six months as “good,” “fair” or “poor,” also asking builders to rate traffic for 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. While current ratings lag those taken amid a pandemic-induced housing boom, the HMI index gauging current sales conditions in January rose four points to 40. The component charting sales expectations for the next six months increased two points to 37, while the measure for traffic among prospective buyers increased three points to 23.

“New home starts declined in December, as the housing market continued to show signs of tightening,” says Kelly Mangold of RCLCO Real Estate Consulting in Bethesda, Md. “However, with mortgage rates declining somewhat in December, builders have begun to feel more optimistic that conditions may improve in the new year.”

The combination of slightly lower mortgage rates and builder discounts may bring rise to more buyers, Mangold says, adding, “especially after the historically slow holiday season is over and as spring buying season approaches.” Other factors influencing the market include inflation, which shows signs of decline, and a job market that remains relatively strong despite an economy that remains hinged to talks of a possible recession.

“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 chairperson 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.”

Privately-owned housing starts in December 2022 were at a seasonally adjusted annual rate of 1,382,000—1.4% below the revised November 2022 estimate of 1,401,000. One exception includes the market for new custom homes, which Census Data from a Quarterly Starts and Completions by Purpose and Design survey shows expanded in the third quarter of 2022, with a 5% year-over-year increase compared to the third quarter of 2021. Over a four-quarter period, custom housing marked a 9% gain from the prior four-quarter total.

Builders are by no means out of the woods yet, as they continue to grapple with issues such as elevated construction costs, building material supply chain disruptions and challenging affordability conditions, NAHB officials say. But housing demand is set to rebound in the months ahead, suggests NAHB chief economist Robert Dietz, driven by improved affordability. A change of pace is inevitable, he and other experts say, as the nation faces a structural housing deficit of around 1.5 million units.

For a more in-depth look at the current state of housing and the economy, and expert predictions for the year ahead, see [DWM]’s 2023 Outlook in the January-February edition of the magazine.