The National Association of Home Builders (NAHB) says the housing recession that began in 2022 will bleed into 2023 as elevated inflation and mortgage rates, coupled with high building material construction costs, continue to take a toll on the housing industry. However, the second half of 2023 could lead to a turning point for housing and the economy.
“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,” said Robert Dietz, chief economist of the NAHB, during a housing and economic outlook press briefing at the 2023 International Builders’ Show. “This forward momentum will lead to a calendar year gain for single-family starts in 2024.”
While home prices are declining in many U.S. markets, this has not been enough to boost housing demand. Affordability conditions continue to deteriorate as mortgage rates have more than doubled since the beginning of 2022. The difference between a 3 percent and 6 percent mortgage rate can add more than $700 per month to the cost of a typical home loan. As a result, NAHB is forecasting that home prices could fall as much as 15 percent in 2023 following a nearly 40 percent Covid-era gain.
Fed Tightening Nears Its End
With inflation showing signs of easing from a 40-year high, the economy weakening and the housing market already in a recession, the Fed’s actions to raise interest rates to rein in inflation should come to an end by the first quarter of this year. NAHB is forecasting that the Fed will raise short-term rates by another 25 basis points in February and a final quarter-point increase in March.
“Roughly 40 percent of the CPI is based on housing, and the Fed can do little to tame housing inflation,” said Dietz. “The only way to bring down housing inflation is to build more affordable housing.”
NAHB believes the cumulative effect of the central bank’s rate hikes will be a peak rate of just above 7 percent. But looking forward, NAHB expects mortgage rates to fall below 6 percent by 2024. “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,” said Dietz.
Supply-Side Factors
At its peak growth rate following the pandemic, building material prices were increasing at a 24 percent annualized rate. That pace has slowed significantly due to Fed tightening and reduction in demand stemming from higher mortgage rates. Nonetheless, many builders continue to experience supply chain disruptions for electrical transformers, concrete, appliances, doors, windows, and other building materials.
One bright spot is lumber. During the post-pandemic boom, a surge in demand and insufficient lumber supply, combined with tariffs on Canadian lumber shipments into the United States, caused prices to soar as high as $1,500 per thousand board feet. As a result of the housing downturn, supply is no longer an issue for most builders, and the price of framing lumber has fallen below $400 per thousand board feet — back to pre-pandemic levels. However, additional lumber will be needed as the housing market rebounds later in 2023.
On the labor front, the number of open construction positions was 388,000 in November 2022, and a focus on resolving this problem will be a key issue for the industry in the coming decade. “We will need 740,000 construction workers annually to account for industry expansion and industry retirements,” said Dietz. “Recruiting, training and retaining skilled workers will be job No. 1.”
The Forecast
Given these market challenges, 2022 was the first year that single-family starts declined in 11 years, falling an estimated 12 percent to 999,000 units. NAHB is projecting that single-family production will fall to 744,000 units this year before rebounding to a 925,000 annual pace in 2024. The 2022 and 2023 declines appear dramatic because production was running at a very solid level above a 1.1 million annualized pace through the first quarter of 2022 before beginning a steep decline as mortgage rates rose rapidly and the housing market weakened.
The remodeling sector remains on solid ground and will do better than the single-family and multifamily markets during the housing downturn. Residential remodeling activity is estimated to increase 7 percent on a nominal basis in 2022 following a growth rate of 13 percent in 2021 as people continue to use their home for more purposes such as offices, schools and gyms. However, with housing demand weakening, remodeling growth is expected to slow, posting a nominal 5 percent gain this year and a 4 percent increase in 2024.