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Homebuilder confidence drops for 12th straight month

Meghan McCarty Carino Dec 19, 2022
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With mortgage interest rates nearly doubling this year, homebuilders are pulling back on new projects. Frederic J. Brown/AFP via Getty Images

Homebuilder confidence drops for 12th straight month

Meghan McCarty Carino Dec 19, 2022
Heard on:
With mortgage interest rates nearly doubling this year, homebuilders are pulling back on new projects. Frederic J. Brown/AFP via Getty Images
HTML EMBED:
COPY

Homebuilder sentiment fell yet again in December, topping off a year of monthly declines.

The National Association of Home Builders/Wells Fargo index of confidence among single-family home builders dropped to its lowest level since 2012 — not counting that first chaotic month of the pandemic in 2020. 

On Tuesday, we’ll find out just how much rising interest rates have affected construction. (Probably a lot.)

2022 has been a disorienting year for homebuilders, according to Rick Palacios Jr., director of research at John Burns Real Estate Consulting. “It was a buzz saw.”

Builders were scrambling to find materials and workers early in the year. Now, mortgage interest rates have nearly doubled, so they’re pulling back on new projects.

“Homebuilders are really in this mode of reset, clearing the decks,” Palacios said.

That’s a normal response when demand declines, but the housing market has not really been normal for a while, according to Richard Green, who heads the USC Lusk Center for Real Estate.

“We went basically 10 years with low levels of housing construction. So even if we got to normal, we’re not catching up on that 10 years of lost supply,” Green said.

That was after the housing crisis in 2008, when new construction all but dried up. Then, housing became scarce and expensive as the large millennial generation came of age. 

Construction couldn’t keep up with their demand, said Robert Dietz, chief economist with the National Association of Home Builders, adding that there’s still a deficit of about 1.5 million units. 

“We’ve called it the five L’s, the limiting factors in homebuilding,” he said. “It’s labor, lots, lumber, lending and then legal and regulatory issues.”

Some of those were exacerbated by the pandemic, but he said others are long-standing — including a shortage of construction workers and restrictive zoning.

Meanwhile, apartment construction has been thriving, per Anirban Basu, chief economist at Associated Builders and Contractors. That should ease rental costs, he said.

“Here’s the issue: A lot of people don’t aspire toward being renters,” he said. “They don’t want to make the landlord rich, they aspire to being homeowners.”

Once mortgage rates settle down, Basu said, those folks will likely be back in the market for houses — putting pressure on builders once again.

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