Homebuilder Confidence Drops to 13-Month Low on High Material Costs and Surging Home Prices

A carpenter works on building new townhomes in Tampa, Fla., on May 5, 2021. Octavio Jones/REUTERS

Homebuilder confidence fell in August to its lowest reading in 13 months, driven down by higher construction costs, supply shortages, and rising home prices sidelining prospective buyers, according to the NAHB/Wells Fargo Housing Market Index (HMI).

Sentiment among single-family homebuilders fell by five points to a reading of 75 in August, according to the HMI measure. In July 2020, builder sentiment stood at 72, after plunging to 30 in April of that year, when pandemic lockdowns sent the economy into a tailspin.

Readings above 50 indicate more builders consider sales conditions to be good rather than poor.

The HMI index component that gauges current sales conditions fell five points to 81 in August, while the part that measures traffic of prospective buyers also recorded a five-point drop to 60.

“Buyer traffic has fallen to its lowest reading since July 2020 as some prospective buyers are experiencing sticker shock due to higher construction costs,” NAHB Chairman Chuck Fowke said in a statement.

Homebuilders have been hit by rising material and skilled labor costs, which, combined with a shortage of housing stock, has sent U.S. home prices soaring. The median price of an existing single-family home surged by 22.9 percent in the second quarter of 2021 compared to the same period last year, hitting an all-time high of $357,900, the National Association of Realtors (NAR) said in an Aug. 12 report. The nearly 23 percent rise represents an increase of $66,800 from a year ago.

Surging home prices have increasingly sidelined prospective buyers, with a separate NAHB report showing that the main reason people actively looking to buy a home gave for not pulling the trigger on a purchase was the inability to find one within their price range. Two-thirds of active buyers in the second quarter of 2021 spent three months or more searching for a home but remained empty-handed, according to the report.

“While the demographics and interest for home buying remain solid, higher costs and material access issues have resulted in lower levels of home building and even put a hold on some new home sales,” NAHB Chief Economist Robert Dietz said in a statement.

Building material prices have increased 19.4 percent over the past 12 months and 13 percent in the year to date, according to the latest Producer Price Index (PPI) report released by the Bureau of Labor Statistics.

Meanwhile, the component of the NAHB/Wells Fargo housing market index that charts sales expectations over the next six months held steady at 81 in August.

“While these supply-side limitations are holding back the market, our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions,” Dietz said.

Homebuilder sentiment varied regionally, with three-month moving averages for the NAHB/Wells Fargo HMI scores showing a one-point drop to 74 in the Northeast, the Midwest fell two points to 68, the South registered a three-point decline to 82, while the West recorded a two-point drop to 85.