Builder Confidence Holds Steady Despite Record High Lumber Prices

After back-to-back months of slightly lower scores, the NAHB/Wells Fargo Housing Market Index (HMI) crawled back up a single point in February to 86. While not a huge gain, this incremental increase suggests that while the historically high levels of demand for housing seen in the U.S. over the last year may be unsustainable, builders remain optimistic about the current and future state of the housing market.

Robert Dietz, chief economist for the National Association of Home Builders, outlined in a statement a few of the reasons home builders remain bullish despite challenges facing their industry.

“Demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower cost markets, but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks,” said Dietz. “Some builders are at capacity and may not be able to expand production due to these headwinds.”

The HMI is designed to reflect current sentiment among home builders, gauging their confidence in the market for newly-built single-family homes. It asks them to rate the condition of the current market and their expectations for the next six months. It is important to note, though, that the February 2021 HMI score is based on data collected earlier in the month, just before lumber prices skyrocketed back up to record-high levels.

Whether rising lumber prices influenced February’s HMI score or not, the corresponding increase in the cost of construction materials is certainly having a huge impact on homebuilding.

“Lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows,” said Chuck Fowke, chairman of the NAHB. “Builders remain very focused on regulatory and other policy issues that could price out households seeking new homes in a tight market this year.”

The negative effects of climbing lumber prices are not limited to residential construction. Last week, the Associated General Contractors of America (AGC) wrote a letter to President Joe Biden requesting federal intervention to slow or even reverse these extreme price increases. AGC chief executive officer Stephen Sandherr noted lumber prices touch many aspects of the construction industry, not just home building.

“While lumber is sometimes considered a product that is important only in single-family house construction and remodeling, in reality lumber and other wood products are used in every type of building construction,” wrote Sandherr.

Sandherr recommended several ways the federal government could provide relief to builders during this ongoing lumber price crisis.

“AGC believes the White House can play a constructive role in mitigating this growing threat to multifamily housing and other construction sectors by urging domestic lumber producers to ramp up production to ease growing shortages and making it a priority to work with Canada on a new softwood lumber agreement,” Sandherr wrote.

“We also urge the administration to look for ways to facilitate shortening delivery times of lumber to end users. This could include easing cross-border truck and rail shipments, unloading at ports, hauling of logs and other raw materials to mills and engineered-wood producers, and shipping wood products to distributors and construction sites.”