Home Builder Confidence Dips to Lowest Level Since August as Concerns Grow About Rising Material Costs and Higher Interest Rates

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The numbers: The construction industry’s confidence waned in March, according to research from a trade group released Tuesday.

The National Association of Home Builders’ monthly confidence index dropped two points to a reading of 82 in March, the trade group said. This was the index’s lowest reading since August.

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 onset of the COVID-19 pandemic.

“Builder confidence peaked at a level of 90 last November and has trended lower as supply-side and demand-side factors have trimmed housing affordability,” Robert Dietz, chief economist at the National Association of Home Builders, said in the report.

What happened: The three main indicators that guide the overall index trended in different directions in March.

The gauge of current single-family home sales slipped three points to 87. However, the index of expectations for future sales over the next six months rose by that same amount to 83, while the index that measures sentiment regarding prospective buyer traffic held steady at 72.

Sentiment declined across most parts of the country. The index fell the West, the Midwest and the Northeast, but remained flat in the South.

The big picture: Demand for new homes remains high thanks to the shortage of existing homes for sale, which should prop up builders’ business. Yet two factors are driving the growing pessimism within the construction industry.

The primary concern is that the cost to build is rising rapidly, thanks to higher lumber prices. The price of wood used to construct homes has more than doubled since April 2020, amid supply shortages and high demand. “While single-family home building should grow this year, the elevated price of lumber is adding approximately $24,000 to the price of a new home,” Dietz said.

A separate survey from investment banking firm BTIG found that 89% of builders reported raising their base prices for homes in February, a record high.

A secondary concern among builders is the rise in mortgage rates so far this year. Higher rates at the very least will likely curtail buyers’ budgets, but could end up reducing home-buying demand at the margins as some people are priced out of the market.

What they’re saying: “Business remains very strong, but we expect many builders will purposely slow sales due to extended backlogs, leading to slower order growth,” home-building analysts at BTIG wrote in their monthly home builder survey report.

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