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Builder Confidence Slips in June: Is Housing on Shaky Ground?

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The confidence level among the nation's homebuilders slipped in June to the lowest level this year and below its six-month average of 70 as tariffs on lumber and other imported materials are coming in the way of buyers’ affordability, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index.

Shares of homebuilders like KB Home (KBH - Free Report) , D.R. Horton (DHI - Free Report) , Toll Brothers (TOL - Free Report) and Lennar (LEN - Free Report) fell 1.6%, 2.1%, 2.4% and 1.6%, respectively, on Monday. Apart from builders’ perception, looming trade war concerns after China's retaliation to U.S. tariffs pulled Wall Street down modestly yesterday.

Nonetheless, homebuilders remain confident about the upcoming period, given the robust consumer demand.

Key Takeaways

Homebuilder sentiment fell two points in June to 68 and all three indices — present sales, future sales and buyer traffic — declined one point. In the words of NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, LA, "builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017."

Notably, all three Housing Market Index components fell one point in June. Current sales conditions decreased to 75. Buyer traffic decreased to 50 and sales prediction over the next six months slipped to 76.

Meanwhile, challenges like inventory shortage are still prevailing in the U.S. real estate market and creating upward pressure on prices in several parts of the country, thereby affecting affordability. Additionally, mortgage rates are surging in proportion to U.S. government bond yields, in anticipation of higher rates of inflation and further monetary tightening by the Fed. Rising mortgage rates may dilute demand for new homes.

Construction Prices Are Soaring

Apart from tariffs on lumber, the U.S. Government’s recent move of imposing tariff on imported steel and aluminum has also stirred concerns among investors about the construction sector. According to an Associated Builders and Contractors (“ABC”) analysis of information provided by the U.S. Bureau of Labor Statistics, May construction material prices increased 2.2% month over month, representing the largest monthly increase in 10 years (since May 2008). On a year-over-year basis, the price of construction materials increased 8.8%.

ABC Chief Economist Anirban Basu is concerned about rapidly rising construction materials prices and stated that current solid economic expansion may eventually disappear as inflationary pressures become increasingly apparent. He added that real estate and construction cycles are particularly vulnerable to increases in borrowing costs.


Myriad problems have been decelerating the homebuilding industry of late, as evident from the 17.1% year-to-date decline against a 4.1% rise of the S&P 500 Composite. Even big names like Lennar, D.R. Horton, PulteGroup (PHM - Free Report) , KB Home and NVR Inc. (NVR - Free Report) have plunged 17.9%, 17.9%, 10.9%, 19.6% and 11.5%, respectively, so far this year.

Robust Demand Raises Hope

Despite June’s drop, NAHB chief economist Robert Dietz remains optimistic about the industry given solid housing demand (mainly for single-family construction), improved economic growth and continued job creation.

Regionally, on a three-month moving average, builder sentiment in the Northeast rose 2 points to 57, while the West and Midwest remained unchanged at 76 and 65, respectively. Sentiment in the South fell 1 point to 71.

It is to be noted that any reading above 50 indicates that more builders expect sales conditions as good rather than poor. The index has remained above 60 since September 2016. Growth is expected to accelerate in the coming period as the industry starts to feel the impact of bigger after-tax paychecks along with a strong job market.

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