Builder Confidence Recovers On Bet That Demand Compensates For Inflation, Supply Crisis

The ongoing and deepening supply chain crisis, combined with persistent labor shortages, is doing a number on housing construction timelines. But the ongoing demand for new homes is buoying builder confidence nonetheless.

Homebuilder sentiment rose 4% to 80 from September to October on the National Association of Home Builders/Wells Fargo Housing Market Index, CNBC reports. While it is well short of the record of 90 hit last November, anything above 50 corresponds to a positive outlook from homebuilders.

The three demand-side indicators that contribute to the overall confidence index all rose in October: current sales conditions, sales conditions over the next six months and buyer traffic, CNBC reports. Perhaps the only thing that could dampen the demand would be the lack of supply causing rising prices to get out of hand.

The median price of a new construction home rose 20% from August 2020 to August 2021, according to data from the U.S. Census Bureau reported by CNBC.

Residential construction permit applications fell by 7.7% from August to September, the steepest drop since February, according to data from the U.S. Commerce Department reported by Bloomberg. Multifamily permits' sharp decline dragged the overall numbers down, with single-family permits holding relatively flat. Commerce data also showed that single-family home construction starts stayed flat while multifamily starts fell by 5% in September.

The slowing of construction starts has so far done little to alleviate the backlog in the pipeline, as 144,000 single-family homes had received permits but had not started construction in September, only a slight retreat from a 15-year high set in the summer, Bloomberg reports. The number of homes under construction but not yet completed hit its highest level since 1974 in September.

The imbalance between supply and demand has become so dramatic that it is causing seemingly similar data sets to produce contradictory results. Dodge Data and Analytics' September construction report found that multifamily construction starts rose 29%, a massive difference from the 5% decrease in Commerce Department data.

But Dodge's report used the overall dollar value of construction projects rather than the number of housing units, underscoring just how much more expensive construction has become on a per-unit basis. For example, the New York Building Congress estimates that construction spending in New York City is projected to dip by less than $2B from 2021 to 2023 from the years before the coronavirus pandemic, but adjusted for inflation, the difference is closer to $38.2B.

Prices have risen dramatically since the start of the year for all kinds of products, both consumer goods and construction or manufacturing materials, causing an inflationary environment that will soon have the Federal Reserve buying fewer Treasury bonds and less mortgage debt. The average interest rate for 30-year mortgages is expected to rise from about 3% now to 4% by the end of next year, according to new projections from the Mortgage Bankers Association reported by CNBC.