Supply Constraints, Higher Interest Rates Damper Builder Confidence

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, the National Association of Home Builders reported Wednesday.

The NAHB/Wells Fargo Housing Market Index showed builder confidence in the market for newly built single-family homes fell by two points in March to 79 from a downwardly revised reading in February. This is the fourth straight month that builder sentiment has declined and the first time that the HMI has dipped below the 80-point mark since last September.

The HMI index gauging current sales conditions fell three points to 86; the gauge measuring sales expectations in the next six months plunged by 10 points to 70 to its lowest level since June 2020; and the index charting traffic of prospective buyers posted a two-point gain to 67.

Three-month regional moving averages showed the Northeast fell by 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.

“Builders are reporting growing concerns that increasing construction costs—up 20% over the last 12 months—and expected higher interest rates connected to tightening monetary policy will price prospective home buyers out of the market,” said NAHB Chief Economist Robert Dietz. “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.”

“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,” said NAHB Chairman Jerry Konter, a builder and developer from Savannah, Ga.

The index is calculated so that any number over 50 indicates more builders view conditions as good than poor.

For more information on builder sentiment, see today’s MBA Builder Applications Survey story in MBA NewsLink. On Thursday, HUD and the Census Bureau release the February New Residential Construction report; and on Friday, the National Association of Realtors releases its monthly Existing Home Sales report.