High Inflation Decreases Homebuilder Confidence and Housing Supply

January 28th, 2022  / Author: Cesar Gomez
News

The National Association of Homebuilders had a one-point decrease in the housing market index this month. This index reflects the confidence of around 900 builders regarding future home sales. A one-point decrease is not an alarming number, but it is becoming apparent that inflation makes single-family housing construction difficult.

For the last four months, the confidence index was on the rise, so this new statistic broke a streak, and it shows a lack of optimism for future sales in the home-building business. Current sales conditions, sales expectations, and buyer traffic are the three components of an index. Out of the three, only the current sales conditions showed no change, while the other two fell by two points each.

Builders are facing high and volatile prices for building materials, such as gypsum, steel, aluminum, and softwood lumber. Prices of wooden materials and supplies have skyrocketed in the past year, probably due to the government putting major lumber duties on imported lumber, as well as a shortage in supply because of the wildfires.

Homebuilders report that the shortage and price volatility of building materials make the construction process very frustrating, and months behind schedule. The construction that was 6 months long before, now lasts up to 4 months more.

This is rippling throughout the housing market, as the lack of lumber and the 12% inflation of lumber produce is damaging the remodeling jobs, construction of multiple-family homes, and every other wood-framed property. Not to mention the disruption of the entry-level housing that the prices and delays are making. All of this hits directly the first-time homebuyers of single-family units, who are less willing to agree to an unexpected price.

As much as the prices are high, it is the inconsistency of prices’ upward motion that is creating big chaos in the housing market. Having a solid home-building business means providing clear estimates for the timing of the process, as well as exact fluctuation of prices during that time.

Inflation is making it hard to create appraisals because the cost is rising too rapidly. Builders are trying to find ways to balance the affordability of the house and their business’ welfare. They are making compromises in advance, so as to intercept the inflation rate before it creates a problem later in the process. Unfortunately, this means that some builders will use cheaper supplies, maybe even materials of poor quality.

Another thing agonizing the home building business is the shortage of skilled labor. The coronavirus did not help, but it is not the main cause of labor insufficiency; rather, it’s the disinterest in manual work by younger generations. Retiring baby boomers are creating more and more holes in the construction business that millennials are not eager to fill.

These circumstances have an immediate impact on the housing market. Builders are not taking in new projects, as they are unable to anticipate necessary costs and time. Some even abandon started projects, as the cost starts escalating. Thus, leaving the shortage in supply in a stagnant state, while the housing prices continue to skyrocket.

People in the construction business expect help from policymakers, and some of them did oblige. Namely, a bipartisan group of lawmakers sent a letter urging President Biden to take initiative and appoint a supply chain coordinator - a temporary solution for the economic slowdown.

Unfortunately, there will be rising costs and scarcity until the tariffs on imported materials and goods are not reduced. Some experts hope that the new attempts to stop the inflation rate from going through the roof could slow down the rising mortgage rates, which could keep the pressure off of builders. Nevertheless, affordable housing should be a priority goal for both home builders and policymakers.

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