Supply Chain and Inflation Concerns Ding Builder Confidence Index

Builder confidence stumbled a bit this month, breaking a four-month streak that had pushed moved the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) 8 points higher. The index, which quantifies builder confidence in the market for newly constructed homes, dipped 1 point in January to 83.

Robert Dietz, NAHB’s chief economist said higher materials costs and lack of availability are adding weeks to the construction time of a typical single-family home and the aggregate cost of residential construction materials has increased almost 19 percent in the last month. Policymakers need to take action to fix supply chains and obtaining a new softwood lumber agreement with Canada and reducing tariffs would be an excellent place to start, he said.

The most pressing issue for the housing sector remains a lack of inventory according to the economist. While 2021 single-family starts are expected to end the year about 25 percent higher than the pre-Covid 2019 level, higher interest rates in the coming year will put a damper on housing affordability.

Derived from a monthly survey that NAHB has been conducting for 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index gauging current sales conditions held steady at 90, while the components measuring sales expectations in the next six months and charting buyer traffic each declined 2 points to 83 and 69 respectively.

Dietz pointed out that the January survey data was collected from January 3 through 13 with many of the responses gathered before last week’s jump in interest rates. The impact of those higher rates could be more fully reflected in the February HMI.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell 1 point to 73, while 1-point increases in each of the other three regions took the Midwest index to 75 and the South and West both to 88.