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Builder Sentiment Slumps as Construction Cost Hikes Price

Monday, 21 June 2021 -

Builder sentiment dropped to a 10-month low in June. This is the steepest fall since August 2020.

Key Takeaways:

  • The overall builder sentiment remains high nationally (in historical terms), but the West and Northeast took the biggest hit.

  • Higher building material costs, scarcity of lumber stemming from a decline in softwood availability, as well as shipment challenges, drove down builder sentiment, that's according to the National Association of Home Builders (NAHB)

  • The NAHB’s monthly index shows that homebuilder sentiment has been pushed down 2 points to 81, down from its recent peak of 90, November last year.

The hiking costs of building materials and the declining supply of lumber have led to a hike in prices for new homes. This has led to side-lining home buyers, which is subsequently a barrier for home builders to access loans.

The National Association of Home Builders (NAHB) index has dropped by 2 points to 81, and the buyer traffic also nosedived 2 points to 71. And while any value above 50 is considered a positive indicator, the drop in builder sentiment is the steepest in 10 years.

Construction Material Costs and Shipment Challenge

According to the NAHB chairperson Chuck Fowke, the drop is caused by higher costs of construction materials. Fowke also cited the declining availability of softwood as the reason new home prices have gone up. Therefore, the knock-on effect is that the higher budgets have soared beyond the reach of prospective buyers. Overall, homebuilders have read the caution in the air and slowed down the pace of construction of new homes.

Lumber prices, for instance, have dropped by 10% from their last peak, but these prices are still over 300% more than their average in the last decade. Other essential construction materials are still going at higher prices, and, worse still, home builders are still experiencing delays in the delivery. All these are attributed to the global pandemic-induced shortages from the supply chain disruptions.

Homebuyers Bear the Burden

The overall higher prices of construction, therefore, mean that builders pass on the cost burden to the buyers. In April, for example, the price of a single-family unit was up an annualized 20%, according to the U.S Census Bureau. Such prices are likely to side-line buyers and as well lead to appraisal issues for small-scale builders who comprise 70% of the homebuilding market in the U.S.

The knock-on effect is that home builders are facing difficulties in acquiring bank loans because they lack appraisals. And in case they do, home sale prices come at lower figures than the cost of construction. This means that home builders would either need more equity or abandon the loan altogether.

So, What Is the Overall Picture?

On a national level overall, current sales condition has been pushed down 2 points to 86. Moreover, sales expectation index in the next couple of months has gone down 2 points to 79, while buyer traffic has taken a 2-point hit to 71.

(Written and edited by: The Decision Maker Team)


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