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Diminished Sales Forecast, Rising Costs Lower Builder Confidence

Updated: Jun 11, 2022

By Paul Bergeron

March 18, 2022 at 06:52 AM

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Construction materials costs rose 20 percent in the past 12 months.

Builder confidence dipped for the third consecutive month in March, according to the National Association of Homebuilders.

Ongoing lumber and building material supply-side constraints, rising construction costs and expectations of higher interest rates continue to negatively affect builder sentiment even as buyer demand remains relatively solid.

Builder confidence in the market for newly-built single-family homes moved two points lower to 79 in March from a downwardly revised reading in February, according to the NAHB/Wells Fargo Housing Market Index (HMI).

This marks the first time that the HMI has dipped below the 80-point mark since last September.

“While builders continue to report solid buyer traffic numbers, helped by historically low existing home inventory and a persistent housing deficit, increasing development and construction costs have taken a toll on builder confidence,” NAHB Chairman Jerry Konter said in prepared remarks.

Costs Up 20% in Past 12 Months

NAHB Chief Economist Robert Dietz added, “The March HMI recorded the lowest future sales expectations in the survey since June 2020. Builders are reporting growing concerns that increasing construction costs (up 20% over the past 12 months) and expected higher interest rates connected to tightening monetary policy will price prospective home buyers out of the market.

“While low existing inventory and favorable demographics are supporting demand, the impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022.”

Paul Rahimian, CEO and founder, of Parkview Financial, a private lender that specializes in construction financing, echoes these sentiments, telling that construction materials costs continue to rise as supply chain constraints remain, as well as the uncertainty associated with the war in Ukraine.

“When suppliers are unsure about future ability to provide materials, prices spike until more clarity is provided by the markets,” Rahimian said. “We do anticipate prices will stabilize further in coming months, especially with the threat of multiple Fed rate hikes.”

Prospect Traffic, Sales Conditions Sentiment Also Falls

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index gauging current sales conditions fell three points to 86 and the gauge measuring sales expectations in the next six months dropped a whopping 10 points to 70. The component charting traffic of prospective buyers posted a two-point gain to 67.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell seven points to 69, the Midwest dropped one point to 72 and the South fell three points to 83. The West moved up one point to 90.

Unprecedented Challenges

It is difficult to overstate the challenges facing builders today, Albert Jarrell, Managing Director, National Industrial Development Services, Stream Realty Partners, tells “In my 31 years in the construction and commercial real estate business, I’ve never seen material price increases, shortages, delays, or the inability to secure hard pricing like we are experiencing today.
“Construction budgets and schedules are both increasing to new and unbelievable levels, and the complexity of solving all of these intertwined issues will likely make it difficult to sort out anytime soon.”

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