September 22, 2021

Wood if we could: Home builders feel better even as challenges persist

The housing market is still going strong as the fall of 2021 begins.

And homebuilders in the single-family construction market are feeling a little better as the nation kicks off this year's six months of cooler weather.

Builder sentiment jumped a full point in September to an indexed score of 76 after three months of decline, according to the National Association of Home Builders (NAHB). Their hopes are pinned to lumber prices, which have fallen from sky-high levels while buyer demand remains solid.

Lumber futures hit a record $1,418.50 per board foot in June, but have recently pulled back to a far more manageable $400.

That provides some relief, but there are other issues, according to the NAHB. Delivery times remain extended by pandemic supply chain bottlenecks and a chronic construction labor shortage. After setting a record high NAHB index score of 90 last November, builder optimism had dropped off dramatically.

The biggest problem in today’s market is one of shockingly low inventory, and a lack of new homes to fill it.

As such, the biggest hurdle for builders in the coming months will still be affordability, as they are forced to raise prices in order to keep up with construction costs. Buyers are still getting help from low mortgage rates, but should rates begin to rise, the squeeze will intensify.

Like easy lending, the practice of speculative building mostly went away after the Housing Crisis bubble burst.

Home builders who got caught up in the 2007 frenzy and overbuilt ended up with a whole lot of homes they could not sell, and therefore bills they could not pay. The inability to sell excess product is especially problematic when the product you are selling is so expensive.

Mortgage giant Fannie Mae just lowered expectations for fourth-quarter new home sales from 846,000 units to 789,000 units (annualized), citing supply problems as well as high home prices.

With inventories still low, 2022 might be a repeat of 2021, with home prices rising ever higher, though the pace of growth should be somewhat slower.

Construction issues may also exacerbate partisan disagreements over the path to fixing America's crumbling infrastructure. Congress is set to continue debate on several funding packages this fall.