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Homebuilder Sentiment Hits a Low: Rising Costs Pinch Buyers

Ritujay Ghosh
Although builders reported strong demand for new homes this month, rising construction costs, dearth of skilled labor and rising prices of homes owing to higher mortgage rates have been niggling.

The National Association of Home Builders’ (NAHB) monthly index of builder sentiment fell 1 point to 67 in August, hitting it lowest level in 11 months. This saw shares of major home construction companies declining on Aug 15. The housing market in the United States has been suffering for a while now despite robust economic growth, which is hurting homebuilders.

Homebuilders have been complaining of rising raw materials costs, a tight labor market and higher mortgage rates. Moreover, home prices have increased at a faster rate than wages, which is making homes expensive. To add to the trouble is the higher tariff burden that has seen prices of lumber go up. However, amid this, builders have been reporting robust demand for new homes owing to rising incomes and steady job growth.

Builder Sentiment Hits a Low

The U.S. homebuilding market has been suffering for quite some time now. The National Association of Home Builders’ monthly index of builder sentiment fell 1 point to 67 in August, touching its lowest level since September 2017. The homebuilding market has emerged as a cause of concern with builders continuing to lose confidence in the market.

Although builders reported strong demand for new homes this month, rising construction costs, dearth of skilled labor and rising prices of homes owing to higher mortgage rates have been niggling. Moreover, per the latest report from the U.S. Census, sales of newly built homes declined 5.3% from May to June.

Understandably, sentiments of builders continue to dip given the rising costs, with younger homebuyers finding it extremely difficult to buy homes. It’s not only the overall builder sentiment but the reading for buyer traffic also fell in August. Buyer traffic fell 2 points to 49.

This saw shares of major homebuilders and home construction companies declining on Aug 15. Shares of Lennar Corporation LEN and KB Home KBH declined 1.5% and 1%, respectively on Wednesday. Shares of D.R. Horton, Inc DHI fell 0.4%, while Toll Brothers, Inc. TOL and Beazer Homes USA, Inc. BZH declined 0.3%.

Rising Costs, Tariffs Hit Housing Market

Although any reading above 50 is believed to be positive, the housing market has been softening for months now owing to the rising prices of construction materials, shortages of skilled labor and rising mortgage rates. Higher wages, steady income and job definitely hints at robust U.S. economy. However, higher mortgage rates have escalated the prices of homes. Although interest rates are currently moving in a narrow range, mortgage applications for purchasing a home have been falling.

Moreover, higher raw material costs and shortage of skilled labor have not only escalated the prices of new homes but also have slowed the pace of the housing market’s growth.  On a year-to-date basis shares of Lennar Corporation, KB Home and D.R. Horton have declined 25.3%, 28% and 17.1%, respectively. Shares of Toll Brother, Beazer Homes USA and Hovnanian Enterprises, Inc. HOV have plummeted 29.4%, 37.1% and 52.1%, respectively. Lennar Corporation has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, tariffs have started taking a toll on raw material costs, with prices of imported lumber rising. Moreover, homebuilders feel that raw material prices might further go up in the future, thus affecting the market further.

Summing Up

Undoubtedly, homebuilders are losing confidence in the housing market with rising raw material cost and skilled labor shortage. Higher mortgage rates have seen prices of new homes increasing faster than the wages. Amid all these, homebuilders feel that material costs might further go up owing to the United States’ ongoing trade dispute with its partners.

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