Steep increases in inflation, mortgage rates and building materials costs put the skids on the U.S. housing market in 2022 and led to the first decline in single-family starts in 11 years.
Permits to construct new houses fell 12 percent to 990,000 units last year.
And he slide continues.
The housing recession that began in 2022 is bleeding into 2023 but a recovery is expected in 2024, according to the National Association of Homebuilders, a Washington-based trade group that says its members will construct about 80 percent of the new housing units projected for this year.
How many units will that be?
NAHB forecasts single-family home construction will drop to 744,000 units this year and then rebound to an annual pace of 925,000 units in 2024.
The turning point for housing and the economy looks like it will come in the second half of 2023, according to Robert Dietz, NAHB's chief economist.
"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," Dietz said during a housing 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."
In the meantime, housing affordability continues to deteriorate. Although home prices have dropped in many U.S. markets, it's not enough to offset mortgage rate hikes that have more than doubled since the beginning of 2022.
Home buyers are feeling the pinch as they seek loans. The difference between a 3 percent and 6 percent mortgage rate to a typical loan adds more than $700 per month to the payment.
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.
Signs of the housing recession are everywhere — even the top five markets for single-family residences, which all posted declines in 2022 in terms of the number of building permits issued. Those cooled-off markets are Houston, The Woodlands and Sugar Land regions of Texas; Dallas, Fort Worth and Arlington, Texas; Phoenix, Mesa and Scottsdale, Ariz.; Atlanta, Sandy Springs and Roswell, Ga.; and Austin and Round Rock, Texas.
NAHB also is projecting negative gross domestic product growth for the first two quarters of 2023. That means at least four of the last six quarters dating back to the second quarter of 2022 experienced negative growth.
"Our forecast is consistent with a recession call for a portion of the 2022-2023 period, as the Federal Reserve tightened monetary policy," Dietz said. "Over recent business cycles, we've never had a period where home prices have declined and there has not been a recession. The rest of the economy will slow in 2023 due to tightened financial conditions."
NAHB expects the Fed to raise short-term interest rates by a quarter-point in both February and March and then end its efforts to rein in inflation. But the pain remains.
"Roughly 40 percent of the CPI is based on housing, and the Fed can do little to tame housing inflation," Dietz said. "The only way to bring down housing inflation is to build more affordable housing."
Looking ahead, the NAHB expects mortgage rates to drop 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," Dietz said.