Builders Point to Material Costs and Interest Rates for Slight Decline in Confidence

March 23rd, 2021 by Drew Vass

With a slight decrease in confidence registering among builders in March, officials for the National Association of Home Builders (NAHB) point to material costs and interest rates as culprits. After attempting to persuade the U.S. Department of Commerce to take action on escalating costs for lumber and other materials, officials for NAHB now say those factors have more builders sitting on permits, rather than starting construction for new homes. In addition to material costs and shortages, they also point to increases in interest rates, which rose by 30 basis points over the past month but remain lower than they were the same time last year. Other factors include winter storm Uri, which suppressed building in Texas and some neighboring states.

The latest NAHB/Wells Fargo Housing Market Index (HMI) shows builder confidence in the market for newly built, single-family homes falling two points in March to 82. Derived from a monthly survey, the index gauges builder perceptions of current single-family home sales and sales expectations for the six months ahead, ranking them as “good,” “fair” or “poor.” The survey also asks builders to rate the traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are used to calculate a seasonally adjusted index, in which any measure over 50 indicates that more builders view conditions as good than poor. The index rose to above 80 for the first time in September 2020, where it has remained throughout the COVID-19 pandemic, after peaking at 90 in November.

Starts among single-family homes in January and February of this year were 6.4% higher year over year, but “There has been a 36% gain over the last 12 months of single-family homes permitted but not started as some projects have paused due to cost and availability of materials,” says NAHB chief economist Robert Dietz. Those holdbacks arrive despite the fact that new homes are expected to continue selling at brisk rates, as builders report demand from home buyers remains strong.

“Despite strength in buyer traffic and lack of existing inventory, builders are slowing some production of single-family homes as lumber and other material costs, along with interest rates, continue to rise,” says Chuck Fowke, chairman of NAHB.

Fowke’s comments arrive as interest rates for 30-year fixed-rate mortgages register more than 0.5% lower (at 3.09%) than they were the same last year (when they were at 3.65%). Going forward, they’re expected to remain in the 3% range for the immediate future, says Sam Khater, chief economist for Federal Home Loan Mortgage Corp. (Freddie Mac). “As expected, mortgage rates continued to inch up but are still hovering around 3%, keeping interested buyers in the market,” Khater says. In the end, as some builders show a reluctance for starting projects, “Given the very low inventory environment, competition among potential homebuyers is a challenging reality, especially for first-time homebuyers,” he says.

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