In the most recent edition of the National Association of Home Builders’ (NAHB) biweekly newsletter, Eye on the Economy, NAHB chief economist Robert Dietz provided a housing industry overview that found weaker demand is causing home prices to fall.

Pointing to the recent stabilization in mortgage interest rates and an anticipated tighter monetary policy from the Federal Reserve, Dietz says that the combination will “likely continue to place upward pressure on rates into 2023.” However, he doesn’t discount the possibility of an economic peak, which would be followed by a slowdown that he says would lead to rates leveling off before they start to decline.

Dietz cites Freddie Mac, which recently reported that the average 30-year fixed-rate mortgage for the week of Nov. 23 stood at 6.58%, the lowest since the second half of 2022.

Those factors, Dietz says, contribute to October sales of newly built, single-family homes having a 632,000 seasonally adjusted annual pace. Despite being a 7.5% monthly increase, that figure is 5.8% below the October 2021 estimate of 671,000 per Census data. However, the economist points out, the Census data does not include canceled sales, which are likely running at a 25% rate. A year ago, it was 9%.

“Regardless, the pace of sales has slowed significantly, as evidenced by the fact that completed, ready-to-occupy inventory is rising while the inventory of homes not started is falling in response to weaker demand,” Dietz says.

The weaker demand is causing home prices to fall, the NAHB reports, and the S&P CoreLogic Case-Shiller national home price index fell at a seasonally adjusted annual growth rate of 8.7% in September, the third consecutive monthly decline. Despite the falling numbers, Dietz points out that national home prices are 62.4% higher than their last peak during the housing boom in March 2006. That said, lower traffic numbers means prices will continue to decline going into 2023.

Despite the continued decline, the economist pointed out that some submarkets are showing ongoing, positive conditions, citing the example of custom home building expanding during the third quarter of 2022. That category had 59,000 total starts, a 5% increase compared to the third quarter of 2021. Over the last four quarters, custom housing starts totaled 207,000 units, which is a 9% gain from the prior four-quarter total. Dietz speculates that custom construction likely benefited from improved supply chains, a reduction in the growth rate of the cost of building materials and a stock market rally that helped the higher end of the market.

The Eye on the Economy update, citing the NAHB Multifamily Production Index (MPI), reports that the demands on the housing industry – or the lack there of – is now spreading to the rental market. Confidence in the market for new multifamily housing declined significantly in the third quarter of 2022 and the MPI decreased 10 points to 32 compared to the previous quarter. The MPI is an indicator of future trends within the apartment construction market, which as of the third quarter, is 97% built-for-rent. Multifamily development is likely to fall back in 2023 due to a large amount of supply in the construction pipeline that will slow rent growth, as well as the expectation of rising unemployment in the coming quarters.