US Economy

Homebuilder Confidence Drops From Record High as Rising Prices Hit Buyers

Chris Delmas | AFP | Getty Images
  • Of the index's three components, current sales conditions dropped 4 points to 92. Sales expectations in the next six months fell 4 points to 85. Buyer traffic also decreased 4 points to 73.
  • "Housing demand is strong entering 2021, however the coming year will see housing affordability challenges as inventory remains low and construction costs are rising," said NAHB Chairman Chuck Fowke.

After three straight months of record highs, homebuilder confidence in the single-family housing market pulled back in December.

Builders say they are concerned that buyers are starting to experience sticker shock.

Sentiment dropped 4 points to 86 in December, according to the latest NAHB/Wells Fargo Housing Market Index. That is now the second-highest reading in the history of the index, which dates to 1985. Anything above 50 is considered positive. Last December, the index stood at 76.

"Housing demand is strong entering 2021, however the coming year will see housing affordability challenges as inventory remains low and construction costs are rising," said NAHB Chairman Chuck Fowke, a builder from Tampa, Florida.

Of the index's three components, current sales conditions dropped 4 points to 92. Sales expectations in the next six months fell 4 points to 85. Buyer traffic also decreased 4 points to 73.

Home prices for existing and new homes are soaring. Home prices are up due to high demand and short supply. New home prices face additional pressure because of rising costs for builders.

"The issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs," said NAHB chief economist Robert Dietz. "As the economy improves with the deployment of a Covid-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes."

The average rate on the popular 30-year fixed mortgage dropped to another record low last week, the 15th record low set so far this year, according to the Mortgage Bankers Association. Low rates have given buyers more purchasing power, but they have also added fuel to the fire under home prices. With so many buyers now struggling to afford a home, any bump higher in rates could hurt sales significantly.

Looking at the three-month moving averages, builder sentiment in the Northeast fell 1 point to 82. In the Midwest it was up 1 point to 81. In the South it rose 1 point to 87, and in the West increased 2 points to 96.

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