Homebuilder Confidence Slammed By Perfect Storm Of Challenges

A perfect storm of negative circumstances combined to slam home builder confidence in May, according to a National Association of Home Builders report this week.

Affordability challenges for buyers are growing thanks to rapidly rising interest rates, double-digit price increases for material costs and ongoing home price appreciation.

Builder confidence in the market for newly built single-family homes fell eight points to 69 in May, marking the fifth straight month that builder sentiment has declined and the lowest reading since June 2020.

NAHB Chairman Jerry Konter, a builder and developer from Savannah, Ga., said in prepared remarks, “Housing leads the business cycle and housing is slowing.

“The White House is finally getting the message and [recently] released an action plan to address rising housing costs that emphasizes a very important element long-advocated by NAHB—the need to build more homes to ease the nation’s housing affordability crisis.”

Advocacy Groups Recognize Situation

National Apartment Association and National Multifamily Housing Council applauded the Biden Administration’s response this week, issuing a joint statement, “The administration’s thoughtful proposal rightly acknowledges that there is no single magic bullet that can solve our housing shortage. It is the result of decades of policy failures to address a growing shortage of housing production that has resulted in today’s crisis.”

Research conducted by Hoyt Advisory Services has found that through 2030, the US  will need to build an average of 328,000 apartments every year. That mark has only been achieved five times since 1989.

NAA/NMHC added, “This crisis predates the pandemic and therefore it is critical that local, state and federal governments, along with the private sector, do all they can to reduce regulatory burdens and encourage the development and rehabilitation of housing of all types and price points.”

Lindsay Cullum-Colwell, RA, NCARB, managing principal and creative director, Cullum Homes, tells GlobeSt.com that the confluence of economic and logistical challenges are taking a toll on the all-important national housing industry.

“Potential home buyers are feeling the pinch and taking note,” Cullum said. “While there are geographical variations in terms of the severity of impact, there is no question that a national focus and policy to address these challenges in the home building industry is needed, and quickly.”

David Vincent, investment specialist, Cadre, tells GlobeSt.com that more housing is needed in the US.

“There has been a tailwind of demand for housing partly due to the strong trend of US household formation the past decade,” Vincent said. “There’s a lot of noise in data in the short term—and certainly COVID had an impact—but on a rolling 10-year basis, we’re at formation levels we haven’t seen since the early ‘90s. Data seem to indicate that there will continue to be demand-side pressure for housing.”

NAHB Reports Materials Costs up 19%

NAHB Chief Economist Robert Dietz said that building materials costs are up 19% from a year ago and mortgage rates have surged to a 12-year high in the past three months based on current affordability conditions.

“Less than 50% of new and existing home sales are affordable for a typical family,” Dietz said in prepared remarks. “Entry-level and first-time home buyers are especially bearing the brunt of this rapid rise in mortgage rates.”

Supply Chain and Labor Crushing Processes

Developers are certainly feeling the pain in more than one way.

Tyler Berding, founding partner of Berding & Weil, tells GlobeSt.com that supply chain disruptions are affecting the availability of building materials. “Everything from insulation to plumbing fixtures to framing lumber is scarce. Not unknown before the pandemic, labor shortages in the construction industry only intensified with the virus. Additionally, falling birth rates, a slowdown in legal immigration, and early retirements have created a labor crisis. But demand for new homes is at an all-time high. So, how will these shortages and delays impact the quality of home construction?

“The prevalence of construction defects in new housing often accompanies periods of high demand. When sources of trained labor dry up, builders must obtain workers from unconventional sources—sometimes from the parking lot at Home Depot. 

“The same is true for building materials in short supply—substitutions or changes in accepted installation practices. In addition, builders substitute lower-quality materials for traditional building products. Each of these factors can negatively influence construction quality.”

Berding said that the most acknowledged result of shortages in materials and labor is the cost of new housing. 

“Builders raise the price of new homes to compensate for the expense of hard-to-get materials and delays caused by the lack of labor. 

“Rising home prices may be the most immediate and obvious result of supply chain issues and labor shortages. Still, the impact [could] be most noticeable in the long-term as shortcuts and mistakes made during construction subject portions of a building or home to moisture intrusion or degradation from incompatible materials. 

Highest Homebuilding Volume in 15 Years

Jeff Benach, principal of Chicago-based Lexington Homes, which develops multiple townhome and single-family home communities in the Chicago area, tells GlobeSt.com that in markets like Chicago where there was a much lower volume over the last 10 years leading up to the pandemic, “when things did pick up last year coupled with rapidly rising costs, the preference was to speed up construction to deliver these sold homes quicker and because of rapidly rising costs, also to lock in costs on as many buildings and homes as possible. 

“But, because this market hasn’t done this kind of volume in about 15 years, the construction crews aren’t available to speed up construction, so we can’t buy the materials on some buildings, risking higher costs on sold units.”

Homes Absorption Rates High

Vincent said that it’s possible that some markets may have been overbuilt in the short term and the recent NAHB/Wells Fargo US Housing Market Index seems to support that idea, “but if demographic trends hold then I would expect that supply to be absorbed over time. 

“Of course, the impact that supply and labor shortages have had on prices has to be considered. This isn’t simply a case where demand pushes pricing high enough to support overbuilding, which then leads to a pullback in sentiment and pricing.”

He said that single family housing is only part of the story. 

“Many people don’t want to buy and/or don’t want an entire house,” Vincent said. “Apartment owners often benefit from high housing prices, as rentals are often a more affordable option. The same shortages of labor and materials have also led to less new multifamily construction in some markets which should help existing asset valuations. 

“There are also cities like Charlotte that are undergoing a densification of the urban core which can help alleviate the mismatch between housing supply and demand.”

Sales and Traffic Indexes Fall, Too

Additionally, all three NAHB HMI indices posted major losses in May. The HMI index gauging current sales conditions fell eight points to 78, the gauge measuring sales expectations in the next six months dropped 10 points to 63 and the component charting traffic of prospective buyers posted a nine-point decline to 52.