Home-Builder Confidence Remains Strong, but Buyers Should Expect Rising Prices

The numbers: Despite a multitude of factors making construction more challenging, home builders remained confident in the state of the housing market, according to an industry trade group.

The National Association of Home Builders’ monthly confidence index held steady at a reading of 83 in May, the trade group said Monday.

Index readings over 50 are a sign of improving confidence. A year ago, the onset of the pandemic caused the index to drop below 50 in April and May, but confidence quickly rebounded as many Americans opted to resume their search for a new home last summer.

“Low interest rates are supporting housing affordability in a market where the cost of most materials is rising,” said Robert Dietz, chief economist for the National Association of Home Builders (NAHB), in the report.

What happened: Of the three underlying components to the broader monthly report, the gauge of builders’ expectations for home sales in the next six months improved. The index measuring builders’ attitudes toward current sales conditions remained the same, while the component that measures traffic of prospective buyers decreased slightly.

On a regional basis, builder confidence improved in the South and held steady in the West, but decreased in the Northeast and Midwest to the lowest levels since August.

The big picture: The lack of existing homes for sale and the continuation of the low-rate environment are supporting interest in the market for new homes. But buyers and builders alike are facing price pressure that could complicate the feasibility of sales.

The aggregate material costs for home construction are up 12% compared to a year ago, and builders have indicated that they expect prices to move even higher. The short supply of lumber and steel used to construct homes is a major driver of these higher material costs, in particular.

Builders also face challenges in securing lots and labor in many markets, the NAHB warned. “Some builders are slowing sales to manage their own supply-chains, which means growing affordability challenges for a market in critical need of more inventory,” Dietz said, adding that buyers should expect rising prices.

What they’re saying: “The trend in homebuilding should remain upward due to rising employment, still-low interest rates, and a record-low supply of available homes in the resale market,” said Sal Guatieri, senior economist at BMO Capital Markets, in a research note.

Market reaction: While the Dow Jones Industrial Average and the S&P 500 moved lower Monday morning, home builder stocks, including Lennar Corp., Toll Brothers Inc., D.R. Horton Inc. and PulteGroup Inc., saw larger declines immediately after the report’s release.

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