Rising Cost Of Construction Materials Increases Homebuilder Risk

EDITOR NOTE: Homebuilder sentiment plunged in May of 2020 when the housing market shut down amid the Covid pandemic. But as economies have reopened, the housing market has grown red hot, spurred on by short supply, low mortgage rates, and high buyer demand. Despite the shortage in supply driving home prices skyward, the stream of steady buyers hasn’t yet let up. As increasing construction prices have contributed to a significant rise in input prices, homebuilders are looking to slow down the rate of production to keep their supply chain flowing at a manageable rate. This will invariably drive home prices even higher. As you can see, the factors that feed into inflation are multiple. The Fed is focusing largely on supply chain disruptions and the pickup in purchasing among buyers. But none of this accounts for the surge in industrial (and also agricultural) commodity prices that have already been taking place since before the pandemic. This is a monetary phenomenon and the reason why physical gold and silver investors have been hedging the steady rise in inflation since well before the pandemic. 

Strong buyer demand is keeping homebuilders confident, but rising costs of construction materials are weighing on housing affordability. 

Builder sentiment in the single-family housing market was unchanged at 83 in May, according to the NAHB/Wells Fargo Housing Market Index. Anything above 50 is considered positive sentiment.

The index had plummeted to 37 last May, as the pandemic lockdown hit and the housing market 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 homebuyers are particularly at risk for losing a purchase due to cost hikes associated with increasingly scarce material availability,” said Chuck Fowler, National Association of Home Builders chairman and a homebuilder 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 1 point to 81. Buyer traffic fell 1 point to 73.

On a the three-month moving average, builder sentiment in the South rose 1 point to 84 and was unchanged in the West at 90. In the Northeast, sentiment fell 4 points to 82 and in the Midwest it dropped 3 points to 75.

Original post from CNBC