The National Association of Home Builders (NAHB)/Wells Fargo Home Mortgage Housing Market Index (HMI), published this week, shows numbers continuing to slide across most sectors. The overall preliminary December HMI dropped to 31, from November’s revised number of 33, indicating that builder confidence remains the less-than-positive.

The NAHB attributes high mortgage rates, elevated construction costs running well above the inflation rate and flagging consumer demand due to deteriorating affordability conditions as having “dragged builder sentiment down every month in 2022.”

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. The survey also asks builders to rate traffic of prospective buyers. 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.

“In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers,” said NAHB chairman Jerry Konter, a home builder and developer from Savannah, Ga. “Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions. But with construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices. Only 35% of builders reduced homes prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.”

December 2022 is the fifth month in a row the numbers have remained below 50, though builder confidence has been on the decline all year. The last time Builder Confidence clocked this low was in April 2020, during the early days of the COVID-19 pandemic, when uncertainty put the numbers at 30, which rose slightly, to 37, in May 2020, before slowly increasing again to a high of 90 in November 2020. Numbers hovered around 80 through the end of 2021 before beginning to slip as 2022 wore on.

“The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment,” said NAHB chief economist Robert Dietz. “Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations.”

Dietz added that builders still need to plan a year or more out when thinking about land and construction timelines.

“NAHB is expecting weaker housing conditions to persist in 2023, and we forecast a recovery coming in 2024, given the existing nationwide housing deficit of 1.5 million units and future, lower mortgage rates anticipated with the Fed easing monetary policy in 2024,” Dietz says.

The numbers were down on the regional level, too. The three-month moving averages for regional HMI scores, showed the Northeast fell five points to 37, the Midwest dropped four points to 34, the South fell six points to 36 and the West posted a three-point decline to 26.