Builders Return from IBS to a Tepid MarketFebruary 6th, 2023 by Drew Vass, Executive Editor
February opened on a week of mixed feelings for attendees of the National Association of Home Builders’ (NAHB) International Builders Show (IBS). With more than 110,000 professionals cross pollenating between IBS and the Kitchen & Bath Industry Show, the scene was busy and jubilant—marking Design & Construction Week’s largest attendance ever.
“I’ve been to more than 20 International Builders’ Shows and this was definitely one of the best,” said Joel Barkman, president and CEO of Golden Rule Builders in Catlett, Va.
But Barkman is just one of around 70,000 attendees from the home building side who packed their bags after the show, returning home to what NAHB officials describe as a “housing recession.” The downturn that began last year, with higher interest rates, is expected to continue in the months ahead, NAHB officials said. To support their use of the word “recession,” officials point to the top five single-family markets, all of which posted declines in 2022 when comparing the number of permits issued year-to-date through November 2022 to the same period a year earlier. Meanwhile, the association’s economists are projecting negative GDP growth for the first two quarters of 2023, which would mark negative growth for at least four of the last six quarters. The culprit, officials said, is inflation and higher interest rates, coupled with “stubbornly high building material construction costs.”
But the news isn’t all bad.
“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,” chief economist Robert Dietz told attendees at a press briefing. In the end, the forward momentum gained in the second half of the year is expected to result in a calendar year gain for single-family starts in 2024, Dietz said.
NAHB officials believe the cumulative effect of the central bank’s rate hikes will result in a peak rate of just over 7%. Going forward, they expect mortgage rates to fall below 6% by 2024, a mark that some experts suggest is the tipping point for affordability.
“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 said.
Despite fewer starts and a slower pace of construction, builders continue to face supply side issues for materials and labor, NAHB officials said. On the labor side, there were 388,000 open construction positions in November 2022, compared to 352,000 a year earlier. Meanwhile, prices for building materials remain elevated, officials pointed out. Following the pandemic, material prices reached a peak rate of increase at 24% on an annualized basis and “While the rate of increase in building materials is down year-over-year, costs still remain elevated,” NAHB assistant vice president for forecasting and analysis Danushka Nanayakkara-Skillington told attendees at a press conference.
Home builders who also lean on remodeling could find it a little easier to weather the slowdown, as experts suggest remodeling will do better than the single-family and multifamily construction markets amid the downturn. Even with a slowdown in construction for single-family homes (which drives renovations), remodeling growth is expected to slow, but post a nominal 5% gain this year. That’s less than the 7% increase expected from 2022 and 13% in 2021, but “Remodeling activity should start to pick up by the end of 2023, as interest rates on home improvement loans begin to trend downward,” Nanayakkara-Skillington said.
The association’s medium-term outlook calls for single-family home building to recover later in 2023 and heading into 2024, as interest rates return from their current peak.