Why is builder confidence in the Housing Market Index faltering, despite prime market conditions for new construction? A new NAHB report explains.

Housing inventory is the lowest it’s been since 2005, yet the demand for quality homes (preferably new construction homes) is the highest its been in the post-boom housing market.

Why on earth, then, did the Housing Market Index, the National Association of Home Builders’ (NAHB) industry leading measure of builder confidence, fall for the third straight month in April, dropping from 44 in March to 42?

Rising Construction Costs Hobble Homebuilders

The answer, the NAHB explained in its latest report, comes down to a number of different factors influencing the construction industry:

• Two of the problems, said Rick Judson, the NAHB’s chairman, have been rising construction costs (which have risen faster than home prices in recent months) and, more importantly, “overly restrictive mortgage lending rules,” which have made it increasingly difficult for homebuilders to acquire the appropriate credit for home construction projects.
• Those frustrations are further exacerbated by the fact that, Judson said, sales conditions have actually been improving.
• And indeed, though the Housing Market Index’s components for current sales conditions and buyer traffic both fell in April, the component measuring sales expectations for the next six months actually rose three points to 53, its highest level since February 2007.
• Furthermore, whenever an index reading is above 50, that means more homebuilders are positive towards housing than negative, so the sales expectations reading is certainly a positive development amidst the decline of the overall Housing Market Index.

Slowing Builder Confidence – An Issue of Supply and Demand

David Crowe, the NAHB’s chief economist, said that the problems facing homebuilding right now are classic cases of supply and demand, and finding the right equilibrium for the first growing housing market in nearly six years.

“Supply chains for building materials, developed lots and skilled workers will take some time to re-establish themselves following the recession, and in the meantime builders are feeling squeezed by higher costs and limited availability issues,” Crowe said. “That said, builders’ outlook for the next six months has improved due to the low inventory of for-sale homes, rock bottom mortgage rates and rising consumer confidence.”

For more perspective on why construction workers are in short supply, see our previous coverage on the topic.