Home Builders Are Growing More Confident About the Housing Market—Despite the Rising Cost of Construction Materials

The numbers: The construction industry’s confidence rebounded in April, according to research from a trade group released Thursday.

The National Association of Home Builders’ monthly confidence index increased by a point to a reading of 83 in April, the trade group said.

Index readings over 50 are a sign of improving confidence. The index fell below 50 in April and May of last year amid the onset of the COVID-19 pandemic, but quickly rebounded until setting a record high in November.

“While mortgage interest rates have trended higher since February and home prices continue to outstrip inflation, housing demand appears to be unwavering for now as buyer traffic reached its highest level since November,” Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said in the report.

“NAHB’s forecast is for ongoing growth in single-family construction in 2021, albeit at a lower growth rate than realized in 2020,” Dietz added.

What happened: Two of the three main indicators that inform the overall index improved this month. The gauge of current single-family home sales rose one point to 88, while the index that measures sentiment regarding prospective buyer traffic held increased three points to 75.

However, the index of expectations for future single-family home sales over the next six months fell by two points to 81. Optimism among home builders grew in the South and West regions of the country, but fell in the Northeast and Midwest.

The big picture: Home builders are in an enviable position. Millions of millennials are entering their prime home-buying years — they’re getting married and having kids — as mortgage rates remain near all-time lows. That’s a recipe for strong demand. Yet a decade of under-building and hesitance on the part of would-be home sellers mean there are very few existing homes listed for sale. As a result, buyers are being pushed into the market for newly-constructed homes.

The biggest problem builders are facing right now is sourcing the materials needed to build homes. Lumber remains extremely expensive compared to a year ago. The shortage of semiconductors has caused delays in the deliveries of new appliance. Even steel is harder to come by and more costly than it was last year.

All of these factors are driving up the costs to build homes and extending out the timelines for these projects — at a time when the country’s sorely needs to extra housing inventory.

What they’re saying: “Even after pulling back in recent months, this level would still represent builder confidence in excess of that we saw at the height of the boom in 2006,” said Robert Kavcic, senior economist at BMO Capital Markets, in a research note.

Market reaction: Strong economic data propelled both the Dow Jones Industrial Average and the S&P 500  higher Thursday morning. Home builder stocks, including Lennar Corp., Toll Brothers Inc., D.R. Horton Inc. and PulteGroup Inc., were all up in morning trading ahead of the report’s release.

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