Builder Squeeze

The NAHB/Wells Fargo Housing Market Index dropped two points to 42 in April. This is the third monthly decline from a peak of 47 in December and January. Two of the three components pulled the composite index down; the current sales component fell two points to 45 and the normally lower traffic component fell four points to 30. The expectations for future sales component increased three points to 53, tied for the highest level since February 2007.

 
The mixed signals appear to be a squeeze in the distance between costs and sales price along with underlying positive housing market conditions. Builders are facing increased cost of building materials such as lumber, wood panel, and drywall. At the same time, revving up the building industry is causing shortages and rising costs for labor and lots. In a recent NAHB survey, over half the builders reported shortages in framing crew subcontractors and over 40 percent reported shortages in their own framing and carpenter crews as well as carpenter subcontractors. As a result, over half the builders are paying more for these crews and raising prices on their homes.

 
At the same time, low appraisals relying on distressed sales and inadequately accounting for newer technology and energy efficiencies knock out new home sales and depress the price home builders are able to charge if the buyer is borrowing. Over half the builders reported an appraisal below the cost of production. Consumers also expect extra low prices because of past distress they witnessed in the housing market.

 
Against these pricing pressures, home builders are seeing pent up demand arriving at their models after waiting for several years to make their move. Consumers’ attitude toward a home purchase as measured by the Thomson Reuters/University of Michigan consumer sentiment index is at the same levels it was in late 2004 and early 2005. Mortgage interest rates remain at historically low levels and house prices have started to revive giving confidence to purchasers that they will not lose their investment.

 
The bumpy housing ride is likely to continue but with an upward trend as the industry’s infrastructure struggles out of the worst downturn in over 70 years.

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