Rising materials costs and increasing mortgage rates will test home builders' pricing power this year, as affordability for entry-level and first-time buyers becomes increasingly out of reach.
A new report from Fitch Ratings expects demand to be strong throughout the first half of the year, allowing for small price increases on new builds, but says trends could soften in the second half of 2021. The firm expects gross margins for most of the builders it rates to be flat to slightly down this year, particularly as builders have less wiggle room to pass on costs as mortgage rates increase.
The US Bureau of Labor Statistics' Producer Price Index (PPI) for construction materials has risen year-over-year every month since August, and Fitch analysts expect the trend to continue as demand remains strong and supply chain issues linger on the materials side.
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