Builder Confidence Drops as Interest Rates and Material Costs Increase

Historic lumber prices and normalizing mortgage rates are causing concern for home builders.

According to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), home builder confidence in the housing market fell two points in March as mortgage interest rates and the cost of construction materials continued to climb. The March HMI score of 82 is its lowest since September 2020 and eight points below its peak in December.

“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.

“Supply shortages and high demand have caused lumber prices to jump more than 200 percent since last April. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”

The NAHB and other organizations have been asking for action from lawmakers about soaring lumber prices. They want the lumber supply chain examined to identify what’s causing supply constraints and high prices.

In the last two weeks the NAHB sent letters to Agriculture Secretary Tom Vilsack, U.S. Forest Service Chief Victoria Christiansen and others, asking they use their respective channels to help normalize the cost of lumber.

“Improving the health of our nation’s forests and increasing the supply of domestic timber are not mutually exclusive goals, and we strongly encourage you to maintain current harvesting plans for the National Forest system,” NAHB Board Chair John C. Fowke wrote to Christiansen. “Doing so will restore the health of one of our great natural resources, offer the potential to reinvigorate the forestry industry, and improve housing affordability”

Lumber prices have been plaguing the home building industry for most of the last year. Another issue concerning home builders surfaced more recently. As the broader U.S. economy began to recover, mortgage interest rates started to rise. Coupled with the increased cost of construction materials, that could price potential home buyers out of the market.

“While single-family home building 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. Nonetheless, the lack of resale inventory means new construction is the only option for some prospective home buyers.”

While home builders are right to worry about the upward trend in interest rates, housing market experts don’t expect the market to collapse any time soon. Lending Tree’s Chief Economist Tendayi Kapfidze told Yahoo Finance Live that he believes mortgage rates are still “very favorable” for potential home buyers.

“If you look over the past 10 years, mortgage rates are still lower than 95 percent of the time,” Kapfidze said. “And over the past 30 to 40 years, they’re lower than 99 percent of the time.”

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