May 23, 2022

Builders wary about 2022 housing market

With coronavirus restrictions easing nationwide, builders across the nation can likely expect plenty of home shopper foot traffic entering the 2022 summer sales season.

But the National Association of Home Builders’ (NAHB) monthly confidence index fell in March, even as the industry began ramping up production the month prior.

Starts of single-family homes dipped by 0,2% in April, suggesting that rising mortgage rates are biting the construction industry.

New construction has been backsliding the past two months after rising to a 16-year high in February. At the current rate, 1.72 million homes would be completed in the next 12 months, below the pace of 1.82 million set earlier this year.

Overall builder confidence is still on the positive side, well above the index break-even point of 50. But expectations for single-family homebuilders have dropped 10 points in the last 6 months, the lowest for this metric since June 2020.

While low existing inventory and favorable demographics continue to support strong buyer demand, mortgage rates are likely to continue upward after Federal Reserve hiked rates in March and May, the first two of several expected before the end of 2022.

But the recent jump in mortgage interest rates is just one of many reasons for builder reticence.

Skilled labor shortages have been an issue for at least a decade for the home construction industry, but as the market fizzled away at the start of the pandemic, many builders made the choice to lay off more workers.

As such, they were woefully unprepared when demand suddenly surged. With higher costs come razor-thin profit margins, and builders can’t afford to fill the demand for lower-cost homes. With an even tighter labor market today, there is no indication they can or will be able to meet ongoing demand.

Add in record-high home prices, and the rising cost of building materials, and single-family houses accounted for only about 64% of new construction in April, well below the month's historic average. Starts fell 7.3% to an annual rate of 1.1 million. Perhaps these numbers are illustrative of the supply chain issues that have plagued the industry throughout the pandemic.

Builders are instead putting more focus on big projects with lots of rental units to try to satisfy demand. In April starts on multifamily projects went up a whopping 16.3%.