| Getty Images Key Takeaways Data released by the National Association of Home Builders shows that homebuilder sentiment fell to levels not seen since 2012 (ignoring a brief blip in 2020). Demand for current housing inventory has decreased, even with a shortage of affordable housing. Builders struggle to create new properties at prices people can afford because of the inflationary pressures they face. The struggle is expected to continue throughout 2023, but there is a potential light at the end of the tunnel in 2024. It’s no secret that the housing market has been on a wild ride over the past year. On the one hand, that might be a good thing. Home prices were out of control, and Federal Reserve interest rate hikes have fulfilled the goal of slowing down the inflationary trend in this sector. However, this year has been challenging if you’re a homebuilder. Recent data reveals that homebuilders feel less optimistic about their field than they have in over a decade. This pessimism has negatively affected the lumber markets as well. There is a distant hope that things could get better in 2024. But in the here and now, the outlook is dreary. Homebuilder sentiment has been in decline for 12 months The National Association of Home Builders (NAHB) released new numbers for its Housing Market Index (HMI). Unsurprisingly, it revealed a decline in homebuilder sentiment. The index is down to 31, anything below 50 indicates a pessimistic outlook. Aside from a brief dip with a quick recovery in 2020, this is the lowest we’ve seen the index since 2012. This year has been challenging for the housing market. Home prices increased 45% from December 2019 through June 2022, pricing many potential buyers out of the market. Combined with continual increases in Federal Reserve interest rates since March of 2022, the National Association of Realtors (NAR) predicts the lowest sales rate since 2011 in December 2022. It anticipates sales will continue to drop into 2023. To top it all off, major Players like Redfin are projecting housing price decreases of an average of 4% in early 2023. It can be difficult for homebuilders to bring costs down far enough to meet this decreased demand and price point, especially in an inflationary environment where their costs for everything from raw materials to labor have increased. Homebuilders are so motivated to sell their existing builds in the current environment that 62% are offering incentives, including price reductions, mortgage rate buydowns, and even paying for mortgage points for buyers. This particular season is not a pleasant one for homebuilders. Cause for optimism Luckily, there are reasons to be a bit more optimistic. While December marked a drop in homebuilder sentiment for the twelfth month, the rate of decline slowed for the first time in six months. There are no guarantees, but there’s a chance that this slowdown could indicate we’re nearing a bottom. Part of the reason is that despite Federal Reserve rate hikes, mortgage rates went down from 7.08% in November to 6.31% in recent weeks. By November, mortgage rates had become so far separated from the 10-year treasure bond that there was a market correction. This happened even though the Fed continued to escalate its attempts to curb inflation. The final silver lining is that homebuilders are starting to see the light at the end of the tunnel. While the immediate future doesn’t look great for the housing market, homebuilders reported an increase in future sale expectations for the first time since April 2022. Lumber markets stumble When looking at the HMI numbers, another standout is the struggling lumber market. On Monday, December 19, futures experienced a 4% loss, falling to $370.40. On Tuesday, December 20, the numbers started trending up again, and markets closed at $372.50. Some commodities are more sensitive to specific sectors of the market than others. For example, copper prices are sensitive to what’s happening in the tech sector, including green energy markets. Likewise, lumber prices are sensitive to what’s happening in the housing markets. Prices peaked at $1,609.00 on May 3, 2021, at the height of the homebuying craze. Their next big rally was to $1,441.00 on February 28, 2022. In March, the Fed started raising interest rates, and lumber futures have dropped fairly steeply ever since. Home sales in the US are not expected to rise According to Morgan Stanley, housing prices are predicted to go down by at least 10% between June 2022 and June 2024. This is mainly because people can no longer afford to purchase homes. Compounding the affordable housing shortage are rising interest rates. While mortgage rates have modestly corrected over the past several weeks, those reversals may or may not continue on their current trajectory. The Fed has indicated it intends to continue raising rates through at least the end of 2023 or until inflation gets closer to 2%. If inflation is under control by the end of next year, we might expect the Fed to start lowering its rates, which could bring mortgage rates further down over a longer period. Looking towards a housing market recovery in 2024 It’s hard to make predictions too far out, but the NAHB paints 2024 as a potential housing market recovery period. Much of that has to do with the Federal Reserve’s timeline. It takes time to permit and build a home. According to the latest data from the Census Bureau, new builds took about 7.6 months from start to finish in 2021. That’s before taking into account submitting any permitting paperwork before the build. However, it is too early for home builders to cash in on the potential optimism for 2024, even with that lag time. Building permit approvals fell 11.2% from October to November 2022 and 22.4% year-over-year. Additionally, new build starts were down 0.5% month-over-month and 16.4% year-over-year. Bottom Line Over the short term, the housing market may not look so hot. While that’s bad for home builders and lumber prices, it’s likely not bad for the housing market. Prices increased by 45% throughout the pandemic, and those pricing increases weren’t sustainable. They further contributed to America’s affordable housing crisis. Fortunately, there could be brighter days ahead for home prices and new builds after the Federal Reserve starts lowering rates on the other side of inflation. For those looking to wait this out before entering the housing market or upgrading their house, you can still put your money to work in the markets. You will want to be relatively cautious as you do, and make certain that your investments remain liquid, so when you do find the right house at the right price, you can move quickly. 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