Home Builders – through no fault of their own – are presenting a less affordable product.

And they’re losing confidence in their own market. According to a National Association of Home Builders (NAHB) report April 18, their confidence in the market went down 2 points to 77. It’s the fourth straight month (January 83, February 81, March 79) that their confidence level has lowered.

The NAHB does a monthly survey of members. The members are asked to rate market conditions for the sale of new single homes at the present and during the next 6 months. They are also asked to rate their predictions on the traffic from prospective buyers.

Here are the results:

New home sales at present: The rating in April was 73 (82 in January).
New home sales for the next 6 months: The rating in April was 73 (82 in January).
Traffic from prospective buyers: The rating in April was 60 (69 in January).

Home Builder Confidence Falls for 4th Month – NAHB Report

The median cost of a new-built, single-family home now stands at more than $400,000.

Factors impacting new home affordability are:

Sharply climbing mortgage interest rates, now at 5%, the highest in a decade.
Higher construction costs, due to higher costs of materials
Supply chain disruptions, leading to slower home completion times and lower inventory

NAHB Chairman Jerry Konter and NAHB Chief Economist Robert Dietz said that the housing market is reaching an “inflection point,” or time of significant change.

“The market is going to soften,” he predicted. “Buyers are learning to be patient and strategic.”

“We’ve made the argument for the past 5 years that home builders have faced progressively more supply side constraints,” Dietz said. “And that’s not just in terms of materials.

“We look at the 5 Ls,” he added. “Labor, lumber, lots (availability of buildable land), lending and legal/regulatory hurdles.”

Dietz said that the cost of building materials – the lumber – is the top influencer, with an increase of about 30% since the pandemic.

“It’s costing more and taking longer (to build a house),” Dietz said. “It’s going to price out the entry-level, first-time home buyers.”

How Can Home Builders Adapt?

Dietz said that the increase in the hybrid work model has shifted the housing demand to suburban and rural areas. Workers who would not commute daily began to expand their housing search, where they could get more bank for their buck, Dietz said.

Home builders can respond to that trend, he advised.

“The hybrid work model is creating a change in the home buyer’s geographical search,” Dietz said. “Home builders can also expand and do business in places where the population is growing.”

The supply of resale houses is fairly tight with less than a two-month supply, he added. In a “normal” market, the resale supply would be from 4 to 6 months, he said.

“When there’s a demand, home construction would make up the difference,” Dietz said. “It’s a lot more challenging, but the work will be there.”

How NAHB Does Its Research

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 two points to 85 and the component charting traffic of prospective buyers posted a six-point decline to 60. The gauge measuring sales expectations in the next six months increased three points to 73 following a 10-point drop in March.

Looking at the three-month moving averages for regional HMI scores, the Northeast posted a one-point gain to 72 while the Midwest dropped three points to 69, the South fell two points to 82 and the West edged one-point lower to 89.

HMI tables can be found at nahb.org/hmi. More information on housing statistics is also available at Housing Economics PLUS (formerly housingeconomics.com).

Image: Depositphotos

This article, “Home Builders Confidence Continues to Fall” was first published on Small Business Trends