Homebuilder confidence is high, but rising costs of materials present major risks

Strong buyer demand is keeping homebuilders confident, but the risk of rising construction material costs continues to weigh on housing affordability. 

Builder sentiment in the single-family housing market was unchanged at 83 in May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). Anything above 50 is considered positive sentiment.

The index had plummeted to 37 in May of last year, as the pandemic lockdown hit and the housing market completely shut down. It then rebounded dramatically in June and July, as consumers rushed out to buy suburban homes, seeking more space for working and schooling from home.

Builders now say they continue to see a steady stream of buyers, due in large part to the extreme shortage of existing homes for sale. Continued low mortgage rates are helping some with affordability, but with prices rising fast, purchasing power is weakening.

“First-time and first-generation home buyers are particularly at risk for losing a purchase due to cost hikes associated with increasingly scarce material availability,” said Chuck Fowler, NAHB chairman and a home builder from Tampa, Florida. 

Aggregate residential material costs are now up 12% year-over-year, according to the NAHB, and those costs continue to rise. That is causing a critical problem not just for builders, but for the overall market. 

“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,” said Robert Dietz, NAHB’s chief economist. “Homebuyers should expect rising prices throughout 2021 as the cost of materials, land and labor continue to rise.”

Of the index’s three components, current sales conditions were unchanged at 88. Sales expectations in the next six months rose one point to 81. Buyer traffic fell one point to 73.

On a the three-month moving average, builder sentiment in the South rose one point to 84 and was unchanged in the West at 90. In the Northeast, sentiment fell four points to 82 and in the Midwest it dropped three points to 75.