As home prices across the US continue to skyrocket to record-breaking levels amid a surge in demand for more spacious living, it appears that some buyers are beginning to be priced out of the market – and home builders have taken notice.
According to latest NAHB/Wells Fargo Housing Market Index, homebuilder sentiment dropped to 86 in December’s preliminary reading, which despite the 4 point decline from the prior month, is still the second-highest reading on records dating as far back as 1985. Any reading above 50 is considered positive, and in December 2019 the index only stood at 76. The sudden decline in sentiment amid a strong acceleration amid the pandemic is likely due to builder’s worries that some homebuyers are beginning to experience sticker shock.
Housing demand will likely continue to remain strong heading into 2021, but with prices continuing on their astronomical trajectory, there will be some affordability challenges present, especially as inventory levels remain low and construction costs continue to rise. Of the three components that the index is comprised of, current sales conditions fell by 4 points to 92, sales expectations over the next six months also dropped by 4 points to 85, meanwhile buyer traffic declined by yet another 4 points to 73.
Prices for both new and existing homes have been soaring due to high demand and subdued supply, while new home prices face even more added pressure amid rising input costs for builders. Even prior to the pandemic, some of the issues limiting housing supply were already becoming evident, such as declining land and material availability, as well as a constant skilled labour shortage. The coronavirus crisis however has amplified these challenges, and is thus reflective on the upward pressure on construction costs.
But, once the US economy begins to shows signs of considerable improvement following the mass deployment of a Covid-19 vaccine, interest rates are expected to start rising, making it even less affordable for some potential buyers especially amid a continued strong demand for single-family homes. Although the current record-low interest rates have been granting buyers more purchasing power, they have also added to price pressures; with so many buyers struggling to afford a home as it is, any upward change in rates could hurt sale levels significantly.
Information for this briefing was found via the NAHB/Wells Fargo Housing Market Index. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.