July 25, 2021

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Homebuilder confidence drops as interest rates and lumber prices rise

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A contractor works on a house under construction at the Norton Commons subdivision in Louisville, Kentucky, U.S., on Monday, March 8, 2021.

Luke Sharrett | Bloomberg | Getty Images

A monthly index measuring homebuilder confidence in the single-family housing market fell, as builders face rising interest rates and rising costs for materials, especially lumber.

The National Association of Home Builders/Wells Fargo Housing Market Index fell 2 points to 82 in March. Anything above 50 is considered positive sentiment. The index stood at 72 in March 2020 and hit a high of 90 in November.

The latest results indicate that the housing industry might be in for a rough patch even as the economy roars back.

“Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month,” said NAHB Chairman Chuck Fowke, a builder from Tampa, Florida. “Supply shortages and high demand have caused lumber prices to jump about 200% since last April.”

Of the index’s three components, current sales conditions fell 3 points to 87. Sales expectations in the next six months increased 3 points to 83, and buyer traffic was unchanged at 72.

A record low supply of homes for sale has caused prices for existing and newly built homes to rise quickly. Higher costs for builders are only exacerbating the situation, as these costs are being passed on to buyers. The median price of a newly built home was up more than 5% year over year in January.

“While single-family homebuilding should grow this year, the elevated price of lumber is adding approximately $24,000 to the price of a new home,” said Robert Dietz, chief economist for the NAHB. “And mortgage interest rates, while historically low, have increased about 30 basis points over the last month.”

Rising costs are particularly hard on first-time homebuyers, as the supply on the lower end of the market is leanest. Any increase in mortgage rates also knocks some buyers out of the market, not just because monthly payments are higher but because in today’s tight lending market, they will no longer qualify for the loan.  

Regionally, on a three-month moving average, builder sentiment in the Northeast rose 2 points to 80. In the Midwest it fell 1 point to 80 and in the South dropped 2 points to 82. In the West, sentiment fell 3 points to 90.

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