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Builder Confidence Slips in January: Housing Rally to Fizz Out?

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Confidence among U.S. homebuilders weakened in January as concerns surrounding rising construction costs and COVID-19 cases crept up. U.S. homebuilder confidence fell three points to 83 this month from December, as measured by the National Association of Home Builders’ index. Just two months ago, the index had hit a record high of 90. That said, in January 2020, before the pandemic struck, it came in at 75.

All three Housing Market Index components fell marginally this month. The index gauging current sales conditions fell two points to 90, while buyer traffic slipped five points to 68. Additionally, expectations for the next six months dropped two points to 83.



Rising Costs: A Major Impediment

Builders remain perturbed by supply-side challenges, mainly owing to a huge upsurge in lumber prices. Also, lack of affordable lots and skilled labor is making things even more miserable. Given the scenario, affordability pressure owing to elevated home prices might put a strain on some potential consumers, particularly first-time buyers, considering the income level.

According to the latest Producer Price Index (PPI) report released by the Bureau of Labor Statistics or BLS, prices paid for softwood lumber (seasonally adjusted) rose in double digits (up 12.5%) in December 2020, following a 23.9% decline over the prior two months. The softwood lumber PPI remains nearly 15% lower than the record high set in September. Nonetheless, data — as captured by the BLS survey — suggests that the index will increase more in January.

Is Housing on Shaky Ground?

Record-low mortgage rates have been spurring buying activities in recent times despite persistent economic uncertainties and high unemployment arising from the pandemic. Also, the increasing trend of working from home owing to the coronavirus outbreak is prompting many families to choose to live in lower-cost and low-density communities.

According to the latest Freddie Mac’s Quarterly Forecast, the current low mortgage interest rate environment is expected to continue, given the projection of 30-year fixed-rate mortgage to average below 3% through 2021-end. Moreover, home price is expected to grow 5.4% in 2021 but decline 3% in 2022.

Sam Khater, Freddie Mac’s Chief Economist, said, “While mortgage rates are expected to increase modestly in 2021, they will remain inarguably low, supporting homebuyer demand and leading to continued refinance activity. Borrowers are smart to take advantage of these low rates now and will certainly benefit as a result.”

Despite the drop in builder confidence in January, we are hopeful about the industry growth, given solid housing demand (mainly for single-family construction). Housing continues to help drive the economy forward. It is worth mentioning that builders remain equally hopeful for the upcoming months, given solid demand. Notably, the index remained within mid-80s on an average over the past five months. It is to be noted that any reading above 50 indicates that more builders expect sales conditions to be good, rather than poor.

Currently, KB Home (KBH - Free Report) , Lennar Corporation (LEN - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , M.D.C. Holdings, Inc. (MDC - Free Report) , Meritage Homes Corporation (MTH - Free Report) , PulteGroup, Inc. (PHM - Free Report) and TRI Pointe Group, Inc. (TPH - Free Report) are making the most of the industry positives. While KB Home and Lennar currently sport a Zacks Rank #1 (Strong Buy), the others carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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