With lumber prices more than 300% higher than the average of the last 15 years and supply chain issues related to the epidemic causing other building material costs to rise as well, pushing up home prices and squeezing potential buyers out of the market, U.S. builder confidence surprised the market by falling further.
According to the National Association of Home Builders (NAHB), confidence among U.S. housing developers unexpectedly fell to its lowest level in ten months in June. Some media outlets believe the drop in data means that the continuing rise in the cost of construction materials and labor is pushing some buyers out of the once red-hot U.S. housing market.
Data released by NAHB showed that the housing developer confidence index fell 2 points in June from May to 81, a record low since August last year, and did not remain unchanged from May levels as expected by the market. The index measuring current sales conditions and the index measuring sales expectations for the next six months both fell 2 points to 86 and 79 respectively, both ten-month lows, while the index measuring the number of potential buyers dropped 2 points to 71, the lowest point in five months.
While the index, as long as it is above 50, indicates that developers generally consider market conditions favorable, Chuck Fowke, president of NAHB and a builder from Tampa, Florida, noted that builder sentiment was under pressure in June due to the rising cost of softwoods as well as other building materials and reduced supply. These high costs have put the price of new homes beyond the budgets of some potential buyers, which in turn has led to a slowdown in the pace of new home construction.
NAHB Chief Economist Robert Dietz also noted that builders are using price increase provisions to deal with shortages of building materials, labor and land issues. But despite this, rising new home prices are still pushing buyers out of the market.
CNBC reports that although lumber prices have fallen about 10% from their previous peak, they are still more than 300% higher than the average of the last 15 years. In addition, the cost of other building materials has increased, and there have been delays in deliveries, all related to supply chain issues caused by the epidemic.
The direct result of higher home construction costs is that U.S. home prices remain high.
The S&P Case-Shiller Home Price Index released late last month rose 13.2% in March, the largest increase since December 2005. Meanwhile, the U.S. Department of Commerce announced that the median price of new homes for sale across the U.S. in April was $372,400, a 20.1 percent year-over-year jump, the largest year-over-year increase since 1988.
Financial blog ZeroHedge pointed out after the data was released that the jump in construction material costs led to higher new home prices, which was a negative factor for the otherwise strong residential market.
Soaring home prices have caused a large portion of Americans to choose to “buy to rent,” but the problem is that not only home prices, but also rents are rising rapidly.
According to Apartment List, a U.S. rental platform, the U.S. rent index rose by 2.3% in May, the largest one-month increase since records began in January 2017, compared to 2% and 1.4% in April and March, respectively. In addition, the median U.S. rent rose 5.4% year-over-year in May, another record high. And data from American Homes 4 Rent, a U.S. rental company, showed that rents for new leases rose 10 percent in the first quarter, and jumped more than 11 percent in April.
It is worth noting that, in addition to rising construction costs, price indicators have exploded making U.S. consumers more reluctant to buy housing.
According to the data, the overall U.S. CPI jumped 5% year-on-year in May, the highest growth rate since August 2008, while the core CPI, which removes factors such as food, rose 3.8% year-on-year, a record high since 1992. Another measure of inflation, the PPI, rose 6.6 percent in May, the largest year-over-year increase since the U.S. Labor Department’s November 2010 statistics.
And the World Federation of Large Businesses (Conference Board, also known as the U.S. Conference Board) data show that in the next six months, Americans in the home, car and major household appliances on the 3 major spending categories of purchase intentions have fallen sharply, including the highest rate of decline in the purchase of housing and home appliances in history.
In addition, the University of Michigan survey in June also showed that respondents’ expectations for housing, vehicles and household durable goods prices fell to the most pessimistic level since November 1974.