Homebuilder confidence is plunging, and that's a problem for homebuyers
American homebuilders are losing confidence in the real estate market because of surging mortgage rates and rising construction costs.
The National Association of Home Builders (NAHB)’s housing market index plunged by four points to 40 in October. It was the third consecutive monthly drop and the lowest reading in ten months.
The index measures builder confidence in the single-family housing market. Anything below 50 means builders are pessimistic about market conditions.
So far, the discussion around rising interest rates has focused predominantly on mortgages. But it’s not just homebuyers who are grappling with rising bills; higher rates have pumped up builders' costs, too.
“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said NAHB chairman Alicia Huey. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”
That spells trouble for homebuyers who are banking on supply to fix the housing affordability debacle.
Construction costs surge
In addition to higher financing rates, the costs of land, labor, and building supplies have skyrocketed since the pandemic.
According to Bank of America (BoA), the cost to build a home has “risen at an unprecedented pace” over the last four years. Between 2018-2022, the price of construction material used for single-family homes rose by $38,000, or 45%, BoA said.
Over 82% of construction materials have seen a significant cost increase since 2020, according to building intelligence service Gordion. More than 85% of equipment costs have increased by at least 5%.
Labor costs aren't falling behind, either—with production and nonsupervisory construction wages rising by 5.8% over the past year, according to the Associated General Contractors.
Combined with labor shortages and weaker demand from homebuyers, it’s no surprise that housing starts plunged to three-year lows this summer.
A housing deficit means higher prices are likely
According to NAHB chief economist Robert Dietz, increasing housing production is essential to bringing down shelter inflation, which was “responsible for more than half of the overall Consumer Price Index increase in September.”
The problem? America has an immediate housing shortfall of 1.5 million units, according to a report by the Joint Center for Housing Studies at Harvard University.
In the meantime, experts warn that low housing supply will continue to boost home prices.
“Home prices continue to march higher despite lower home sales,” says Lawrence Yun, chief economist at the National Realtors Association. “Supply needs to essentially double to moderate home price gains.”