The Biggest Issues Facing Home Builders in 2023
Building costs may be dropping, but a majority of builders worry about inflation and its effects on financing, according to a recent survey.
For the last 30 years, the National Association of Home Builders (NAHB) has conducted a monthly survey of single-family home builders in an effort to rate market conditions and provide a six-month forecast. This survey generates the NAHB/Wells Fargo Housing Market Index (HMI), a tool used by analysts at the Federal Reserve Bank, government agencies and Wall Street.
The January 2023 report included a section of special questions about the most significant problems builders faced in 2022 and are likely to face in 2023. The results show builders are less concerned about materials costs and labor availability than in 2022, when the effects of the pandemic slowdown were still being felt. On the other hand, they’re more worried now about financing problems and the difficulty of attracting homebuyers.
A large percentage of home builders expressed ongoing concerns about inflation, which affects material costs and interest rates. As a writer for the Federal Reserve Bank of Minneapolis put it: “Two-thirds of the residential segment identified [inflation] as one of the two greatest challenges they face, not including customer demand.”
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For the survey, the NAHB sent a questionnaire to 3,100 builder members. Of these, 442, or 14 percent, responded. Problems were grouped under five headings — Builder Costs, Financing Problems, Problems Attracting Buyers, Federal Government Policies and Local Land Use Policies. Respondents were asked to check the ones they considered important in 2022 and/or 2023.
The outlook among builders was generally optimistic, with concern about materials costs and the time required to get them dropping roughly 35 percent from 2022 to 2023.
The top concern for 2023, up 12 percent from the previous year, was labor availability. But according to McKinsey & Company, this has been a persistent problem for some time. Builders also demonstrated concern about new building codes and energy efficiency requirements, with about 40 percent of respondents identifying them as growing cost issues.
Respondents were pessimistic about financing, with 93 percent identifying high-interest rates as a significant problem in 2023. That’s up 27 percent from the year before.
Sixty-one percent predicted home buyers would have difficulty securing mortgages. And a growing number, although not a majority, saw looming problems caused by inaccurate appraisals, unfavorable financing terms for builders and lack of credit for land acquisition, development and construction.
Marketing to Potential Buyers
The survey indicated builders were even more pessimistic about attracting potential buyers than about buyers and developers securing financing. The top concerns going into 2023 were that buyers would wait for interest rates to fall and be affected by negative media reports concerning the housing market.
The survey also predicted the general state of the economy and Washington gridlock would have a more negative effect on home sales in 2023 than 2022. And in a radical reversal from 2022, four times more respondents expected buyers to have trouble selling their existing homes, and 10 times more predicted competition from distressed sales and foreclosures.
Federal Government Policies
The No. 1 expected problem for home builders related to government policies in 2023 is inflation, same as in 2022. A majority of builders were also concerned about the impact of environmental regulations and policies on the housing market.
Fewer than one-third of respondents cited other government-related issues — immigration policies, federal intervention in local land-use decisions and taxes on home builders. On all counts, however, more cited them as problems for 2023 than in 2022, which indicates growing concern.
Local Land Use Policies
The outlook for problems caused by local land use policies in 2023 rose slightly. More than half of respondents foresaw problems with inspection, hook-up and impact fees. Slightly less than half indicated concern about environmental regulations, difficulty obtaining permits and changing development standards.
About one-third of builders cited problems arising from inadequate public infrastructure, and about one-fifth were worried about attempts to move development to undesirable locations.