Home-Builder Confidence Slips From Record High in December, as Buyers Get Cold Feet

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The numbers: The construction industry’s outlook worsened slightly in December, according to research from a trade group released Wednesday.

The National Association of Home Builders’ monthly confidence index dropped four points to a reading of 86 in December, the trade group said. This was the first time that the index had dropped after three consecutive months of record highs. Even with December’s decline, the figure represents the second-highest reading in the index’s history.

Index readings over 50 are a sign of improving confidence. The index had fallen below 50 in April and May in the immediate wake of the pandemic.

What happened: The three main indicators that guide the overall index all decreased by four points from November’s reading.

The index that measures sentiment regarding prospective buyer traffic came in at 73. The index of expectations for future sales over the next six months dropped to 85, and the gauge of current single-family home sales slipped to 92.

Sentiment also declined across all parts of the country. The index fell by three points in Northeast, Midwest and South, and by two points in the West.

The big picture: The housing market has remained a bright spot in the economy throughout the pandemic, and despite the monthly decline in December the home-building industry remains on strong footing. That said, builders are responding to buyers who appear to be cooling on the market.

To some extent, this could be a reflection of buyers growing accustomed to low mortgage rates, meaning that cheap financing is no longer providing the same boost to the market. At the same time, rising home prices across the country could be negating some of the benefit of lower interest rates.

While the rollout of vaccines to combat the coronavirus is good news for the economy, it could end up causing a slowdown in the housing market. “As the economy improves with the deployment of a COVID-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes,” Robert Dietz, chief economist at the National Association of Home Builders, said in the report.

Dietz also noted that issues such as the availability of land and skilled labor “will continue to place upward pressure on construction costs,” which could price even more buyers out of the market.

What they’re saying: “There is still an immense undersupply of all types of housing, particularly affordable rental housing which may keep multifamily construction from slowing too much,” Sam Bullard, managing director and senior economist at Wells Fargo Corporate and Investment Banking, wrote in a research note earlier this week.

“Fewer builders are reporting improved [year-over-year] traffic quality than earlier in 2020, which may be a sign of decreased customer urgency, or builders may have worked through a significant number of highly-qualified customers already,” home-building analysts at BTIG wrote in their monthly home builder survey report.

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