Homebuilder Sentiment Drops Over 50% in 2022

Home builder sentiment has dropped over 50% this year from a high of over 83 down to 38. Rising interest rates are the reason cited for this negative outlook score of 38. The NAHB Housing Market Index measures sentiment among builders of US single-family homes and any score below 50 is considered a negative outlook by the builders.

This is the first year since 2011 that we've had a decline in single-family home starts. This is a big deal because if you look at the 2008 financial crash, builders built fewer homes during that time frame. During the ensuing demographic boom and with fewer homes being built, we saw a deficit of about 5.5 million homes during that period. We’re just now back to a normal level of building so we no longer are creating an additional deficit.

Effects of Home Builder Sentiment Being Low

Now that we're decreasing the number of homes built, that 5.5 million home deficit is likely to increase over the next 12 to 24 months. I see two potential scenarios playing out here:

1) Builders need to continue to build homes. With builder sentiment being so low, it's likely that a lot of these builders turn their attention to ‘Build-to-Rent’ communities for investors. What would typically be a neighborhood that's plotted for homes for sale, some of these neighborhoods may turn into rental communities. That will likely decrease homeownership rates in this country and likely increase what a lot of people are calling a ‘Renter Nation’ for the US. Homeownership rates are likely to continue to decline over the next couple of years as a result of this.

2) The other thing I also think could play out is that as builders build fewer homes or a lot of those homes go towards more ‘Rent-to-Own’ rental communities, there's going to be a bigger deficit.

With a bigger deficit as we hit lower interest rates, likely over the next 12 to 24 months, that could create another boom like we saw during the 2020 and 2021 selling seasons. So we might get back to our uncontrollable price appreciation and inflation in the real estate market as a result of this builder sentiment and the slowdown that we're starting to see.

Matt’s Advice

Homebuilder sentiment dropping as quickly as it has and getting below 50 for the first time in a long time is not a good thing when we need more homes in this country. What we really need to do is be able to get that homebuilder sentiment back up. What I would do on the individual level is really focus on new construction because that sentiment is so low. It's an opportunity to get a better value on a home than you could 12 months ago.

Posted by Matt Curtis on


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