NAHB Economic Expert Shares 2023 Insights

North American Hardware and Paint Association (NHPA): What key trends did you see in 2022 in the housing market? Will they continue in 2023?

Danushka Nanayakkara-Skillington (DNS): In an effort to fight persistent inflation, the Federal Reserve continues to tighten monetary policy and raise interest rates. This will cause some economic pain, including a weaker economy and job losses, and we expect a mild recession in the coming year given tightening financial conditions and increased economic uncertainty.

The single-family housing market is weakening as permits and starts continue to decline due to high mortgage rates, ongoing building material production disruptions and lagging demand stemming from rising affordability challenges. Given these market challenges, 2023 would be the first year since 2011 to record an annual decline in single-family home building. And given expectations for ongoing elevated interest rates due to actions by the Fed, the year is forecasted to see additional single-family building declines as the housing contraction continues.

In contrast, multifamily starts posted strong gains this year due to low vacancies and solid demand for rental housing. Home improvement spending also increased as the surge in home equity enabled more homeowners to finance remodeling projects. We expect both multifamily construction and renovation projects will remain strong, though high construction costs and affordability challenges are making some developers increasingly cautious about 2023. We expect multifamily starts to decline next year as supply increases and the unemployment rate rises.

 

NHPA: How has inflation affected the market, and how will it continue to affect the market?

DNS: Persistently elevated inflation is the immediate trigger for current conditions. Inflation has eased but remained near a 40-year high in October, with the CPI up a painful 7.7% year over year. The Fed forecasted its rate hikes would raise the unemployment rate to 4.4% in 2023. This is an optimistic forecast, as NAHB projects a rate above 6% at the end of 2023. Fed Chair Jerome Powell indicated this is part of the “pain” the economy will endure as the central bank combats a 40-year high for inflation. However, economic policy needs to focus on improving the supply side of the economy by bringing down energy, transportation and material costs. Without such policy actions, the Fed is left to do all the work of fighting inflation, and the Fed’s tools are crude: Raising rates slows demand and has an outsized impact on interest-rate-sensitive sectors such as housing.

 

NHPA: How has affordability changed this year? 

DNS: Since the start of 2022, the benchmark 10-year treasury rate, which generally moves in tandem with mortgage rates, has increased from 1.51% to nearly 3.5% in mid-December. The average 30-year fixed mortgage interest rate has increased even more, rising from 3.11% at the start of the year to 6.33% as of December 8th. Combined with higher construction costs and rising home prices, these market dynamics have pushed housing affordability to lows not seen in more than a decade. According to the NAHB/Wells Fargo Housing Opportunity Index, just 42.2% of new and existing homes sold during the third quarter of this year were affordable to median-income households—the lowest reading since the Great Recession. A recent NAHB study shows that every quarter-point hike in mortgage rates would price out 1.1 million households.

 

NHPA: What are some short and long-term impacts of affordability?

DNS: Rising interest rates, ongoing building material bottlenecks, labor shortages and high inflation continue to drive up housing costs. Builder confidence in the market for newly-built single-family homes posted its 11th straight monthly decline in November, dropping five points to 33, according to the NAHB/Wells Fargo Housing Market Index (HMI). This is the lowest confidence reading since June 2012, with the exception of the onset of the pandemic in the spring of 2020. Higher home costs and elevated mortgage rates are pricing buyers out of the market, especially entry-level and first-time buyers. The best way to ease growing affordability challenges is for policymakers to address ongoing supply chain disruptions to help builders bring down construction costs and increase production to meet market demand. But the primary challenge for housing and the economy is higher interest rates, and that will continue to be true until early 2024.

 

NHPA: How have housing trends impacted the home improvement industry this year? 

DNS: The NAHB/Westlake Royal Remodeling Market Index (RMI) for the third quarter of 2022 softened but remained positive. An overall RMI of 77 showcases positive remodeler sentiment due to increases in home equity over the last two years, ongoing demand for work-at-home and an aging housing stock. However, the year-over-year decline indicates a slower growth rate for the market due to the declines in existing home sales along with rising interest rates. Higher interest rates will continue to have a negative effect on home improvements, especially the larger home improvement projects that tend to be financed with home equity loans. However, the interest rate effect on home improvements is not as strong as it is for new construction. NAHB expects the remodeling market to withstand the economic slowdown better than other sectors of home building.

 

NHPA: What are home builders forecasting for 2023?

DNS: We expect broad housing market weakening—including home price declines—heading into 2023, followed by a rebound led by the Fed easing monetary policy and lower rates in early 2024. We expect continued weakness in single-family home building in 2023 as the economy slows. Though multifamily starts posted strong gains this year due to low vacancies and solid demand for rental housing, we forecast multifamily construction will decline in 2023 as the effects of tighter financing and a rising unemployment rate take hold.

Despite these medium-term macroeconomic headwinds, there remains a housing deficit in the U.S. This means as the economy exits this period of higher inflation and a recession in the coming quarters, it will be the housing and home building sector that will recover and expand first. An aging housing stock will also support demand for remodeling activity, and as mortgage interest rates rise, the demand for rental multifamily and single-family housing will remain solid.