Real Estate

Homebuilder sentiment slips in April due to pressure from tariffs and rising prices

Key Points
  • Homebuilder sentiment falls 1 point in April, as builders cite rising costs for materials.
  • The median price of a newly built home jumped 13 percent in February.
  • Demand is strong, but future sales expectations are falling, as prices rise.
Home builder sentiment drops in April

The nation's homebuilders should be ecstatic about their market. Demand is high and supply is painfully low. Builder confidence, however, is slipping, as costs for materials rise.

A monthly index of builder sentiment from the National Association of Home Builders fell 1 point to 69 in April. That is the lowest reading since last November and just 1 point higher than April 2017. Anything above 50 is considered positive. Sentiment hit a high of 74 last December, as the tax cut plan was being passed through Congress.

"Strong demand for housing is keeping builders optimistic about future market conditions," said NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, Louisiana. "However, builders are facing supply-side constraints, such as a lack of buildable lots and increasing construction material costs. Tariffs placed on Canadian lumber and other imported products are pushing up prices and hurting housing affordability."

Builders also were hoping for deregulation under the Trump administration, and they have gotten precious little. Builders estimate that about a quarter of their costs to put up a new home goes toward regulatory compliance.

For buyers, higher costs are a huge headwind, especially as existing home prices rise as well. Most of the demand today is from younger, entry-level buyers who have higher levels of student debt and who may have been paying high rents for the past several years. One of the biggest barriers to entry, according to various surveys of millennials, is saving for a down payment.

Sales of newly built homes were flat in February, compared with a year ago, but the median price was 13 percent higher, according to the U.S. Census. Part of that gain is that builders are more focused on the move-up market, rather than the entry level, where the profit margins are thinner.

Of the NAHB index's three components, buyer traffic was unchanged at 51. Sales expectations over the next six months fell 1 point to 77 and current sales conditions fell 2 points to 75.

On a three-month running average, builder sentiment in the South was unchanged at 73. It fell 1 point to 55 in the Northeast and fell 2 points to 66 in the Midwest. In the West, it dropped 3 points to 76.