A doomed outlook for new home sales 

Now might be a good time to check in on your home builder friends. 2022 was a hard year for builders, and 2023 isn’t looking much better.

Builder confidence in single family residence (SFR) construction fell each month in 2022, according to the National Association of Home Builders (NAHB).

NAHB’s builder sentiment index plunged from 84 at the end of 2021 to an index figure of 31 at the end of 2022. For reference, an index of 50 means an equal number of builders responded favorably and unfavorably.

Today’s low builder sentiment index is similar to where builder confidence was in 2012, when the housing market was still in the doldrums of the Great Recession. In the Western region of the U.S., which includes California, the index figure was even lower, diving from 87 in 2021 to just 26 at the end of 2022.

Since construction is a drawn-out process, often taking a year or longer from start to completion, builders need to have an eye on future economic conditions — and 2023 is not looking good for housing.

Most respondents have an unfavorable outlook for future SFR new home sales in the first half of 2023. In fact, the NAHB forecasts starts will continue to suffer throughout 2023, beginning to bounce back in 2024.

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California’s housing market recession continues

Here in California, SFR construction starts were down roughly 16% from a year earlier during the second half of 2022. This reflects both the downward pressure of ongoing supply shortages and rising mortgage interest rates, which has gutted buyer purchasing power.

However, multi-family construction was actually up slightly in 2022, receiving a boost from various legislative incentives to increase housing inventory for low- and moderate-income households.

Borrowing costs are rising not just for mortgaged homeowners, but for builders, as well. Lenders continue to keep a tight fist on funds, hampering momentum. This dynamic will only worsen as interest rates continue to generally rise in the coming years.

The concurrent building material and construction labor shortages aren’t helping either, with building costs continuing to rise even as it becomes more expensive to borrow. Many builders are still seeking to attract buyers by extending incentives like mortgage buy-downs and offering price cuts. Others are turning to prefabricated construction methods to prevent material shortages from cascading on job sites.

Simply put, today’s recessionary environment is winnowing away builder profits and extending timelines as the potential buyer pool dries up.

Residential construction starts will be held back from reaching their full potential until the recovery from the 2023 recession, with prices expected to bottom around 2025 and the recovery to pick up steam around 2027.

But there is a bright spot for builders willing to take on smaller (maybe even tiny) projects. Accessory dwelling unit (ADU) construction is taking off in California with the passage of several new laws aiming to make ADU permitting more accessible to the average homeowner.

Real estate professionals and builders looking to assist more homeowners with ADU creation can download and personalize firsttuesday’s free marketing material: Client Q&A: What is an ADU and how do I build one?

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