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The nation's homebuilders should be ecstatic, given the supply of existing homes for sale and falling mortgage rates. Instead, they continue to be just cautiously optimistic, due to several roadblocks in their business.
Builder confidence for single-family homes rose just one point, to 65, in July, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Sentiment is well below the July 2018 reading of 68. Anything above 50 is considered positive.
"Builders report solid demand for single-family homes. However, they continue to grapple with labor shortages, a dearth of buildable lots and rising construction costs that are making it increasingly challenging to build homes at affordable price points relative to buyer incomes," said NAHB Chairman Greg Ugalde, a homebuilder and developer from Torrington, Connecticut.
Lower mortgage rates should be helping with affordability, but apparently that's not enough. The average rate on the popular 30-year fixed mortgage fell sharply at the end of May and continued lower in June. It held steady in the first weeks of July, right around 3.8%, according to Mortgage News Daily. It then began moving higher again last week.
"Even as builders try to rein in costs, home prices continue to outpace incomes," said NAHB Chief Economist Robert Dietz. "The current low mortgage interest rate environment should be getting more buyers off the sidelines, but they remain hesitant due to affordability concerns."
The supply of homes for sale, which had been gaining, is now weakening again, and inventories could hit a new low in October, according to a recent report from realtor.com.
Of the HMI's three components, the index measuring current sales conditions rose one point, to 72; sales expectations over the next six months also rose one point, to 71, as did buyer traffic, to 48. Traffic continues to be the only component in negative territory.
Builders have been trying to increase production of entry-level homes, but high costs stand in the way. Last week, Federal Reserve Chairman Jerome Powell told a Senate panel, "You have a shortage of skilled labor, so it's hard to get people on the job, electricians, plumbers, carpenters and other people. No matter what you pay them, just finding people to do that work."
Then he added, "Material costs too have gone up, and some of that is tariffs, for sure. The homebuilders feel almost like they've been hit by a perfect storm here.
Still, lower interest rates should help spur new home purchases in large suburban markets, where approximately one-third of new construction takes place, according to Dietz. Housing starts as well as building permits for single-family homes, however, trended lower in the first half of this year, and sales of newly built homes in May were nearly 4% lower annually, according to the U.S. Census.
Looking at the three-month moving average, builder sentiment in the South rose one point, to 68, and the West was also up one point, to 72. The Northeast remained unchanged at 60, while the Midwest fell one point, to 56.