Builder Sentiment Dipped In January As Inflation Looms Large

Builder confidence slumped in January as concern remains high regarding inflation and supply chain disruptions, breaking a four-month rise in sentiment.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) has hovered at 83 or 84 for the past three months as demand for new homes remains high. The index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor,” and asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Any number over 50 indicates that more builders view conditions as good than poor.

The HMI data collected during the first two weeks of January does not “fully reflect” the recent jump in mortgage rates, according to NAHB Chief Economist Robert Dietz. 

“While lean existing home inventory and solid buyer demand are supporting the need for new construction, the combination of ongoing increases for building materials, worsening skilled labor shortages and higher mortgage rates point to declines for housing affordability in 2022,” Dietz said.

Three month average for regional HMI scores indicate that the Northeast fell one point to 73, the Midwest increased one point to 75 and the South and West each posted a one-point rise to 88, respectively.

“Higher material costs and lack of availability are adding weeks to typical single-family construction times,” said NAHB Chairman Chuck Fowke. “NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2021. Policymakers need to take action to fix supply chains. Obtaining a new softwood lumber agreement with Canada and reducing tariffs is an excellent place to start.”

Builders are also struggling to find lots on which to build: a NAHB survey last fall shows that 76% of builders rated the overall supply of developed lots in their regions as low to very low⁠—an all-time record since NAHB began collecting the data in the 1990s. The prior record was 65% in 2018.Around 46% of single-family builders said the lot supply in their areas was simply low, and 30% said it was very low.