The index measures home-builder sentiment via monthly surveys that ask builders to rate the new-construction housing market based on current sales, sales expectations for the near future and the volume of buyers. Scores above 50 indicate that more builders view conditions as positive, rather than negative.

‘A rebound could be underway’

Last year saw the housing market go through a stark shift in home-builder sentiment, coinciding with rising interest rates, high materials costs and some declining demand. These resulted in Housing Market Index lows not seen since 2012.

According to the NAHB, the current uptick is largely due to a slight drop in mortgage rates. Still, these were the first monthly gains to occur across the three aspects of the Housing Market Index since December 2021, and NAHB chairman Jerry Konter is optimistic for what’s to come. “The rise in builder sentiment means that a rebound for home building could be underway later in 2023,” Konter said in a statement.

“The housing market cooled quickly in 2022 as affordability issues were further compounded by soaring mortgage rates and ongoing supply disruptions,” said Greg McBride, CFA, Bankrate’s Chief Financial Analyst. “As a result, it’s no surprise that we saw 12 consecutive months of declining builder sentiment. A pullback in mortgage rates over the past few weeks has broken that string.”

This pullback in rates, if it continues, could signal a more robust market in 2023. “In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability,” said Robert Dietz, NAHB’s Chief Economist. “It appears a turning point for housing lies ahead.”

Regional housing market differences

Real estate is hyper-local, so it’s not surprising that home builders in different regions of the country expressed different sentiments about their local markets. Home builders in the South held steady in their outlook, with no month-over-month change in their score of 36 — the highest score of the four regions surveyed. In the West, scores actually increased, with January’s 27 being a one-point gain over December. However, the Midwest score dropped two points, from 34 to 32, and the Northeast saw the steepest decline, falling four points from 37 to 33.

What it means for homebuyers

The increase in optimism among home builders, while slight, indicates that there is some positivity on the horizon for buyers. Here are a few takeaways for those looking to buy a home in 2023.

Housing supply still probably won’t meet demand

While confidence may be rising, fears of a recession are still strong. “Home building will likely remain muted in the coming months as economic activity slows,” said McBride. This means available home inventory will remain low, keeping many areas firmly in seller’s market territory.

In addition, Dietz noted that demand could rise if mortgage rates continue to drop, thus making purchasing a home more affordable: “Improved housing affordability will increase housing demand, as the nation grapples with a structural housing deficit of 1.5 million units.”

Home prices may vary widely

With some builders cutting prices to increase sales, new-construction home buyers could find deals in 2023, especially in the beginning of the year. Conversely, if mortgage rates continue to drop and overall housing inventory remains scant, the imbalance between supply and demand could see prices remain high (or even increase). Make sure you have a thorough understanding of your particular market — a knowledgeable local real estate agent can help.

Be smart about your finances

The housing market right now is tough for many, and even with mortgage rates starting to fall, they are still significantly higher than last year. If you hope to buy this year, make sure you’re prepared:

  • Pay down debts: A lower debt-to-income ratio and a higher credit score will help you qualify for a better interest rate on your mortgage.
  • Save for a down payment: The bigger a down payment you can make upfront, the lower your monthly payments will be.
  • Work with an experienced agent: In complicated markets, it’s more important than ever for homebuyers to work with an agent who really understands the intricacies of your local real estate scene and can guide you through the journey.

Bottom line

The NAHB’s newest Housing Market Index shows that, while home-builder sentiment may still be low, it is starting to turn around. For the first time in a year, the results are more positive than the previous month.