Homebuilder sentiment improves in October as lumber prices fall

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WASHINGTON – U.S. homebuilders continue to face several challenges, including a severe labor shortage, but the cost of lumber is coming down. That has builders feeling better.

A monthly sentiment survey from the National Association of Home Builders rose one point in October to 68. Anything above 50 is considered positive. The index was unchanged from October 2017.

“Builders are motivated by solid housing demand, fueled by a growing economy and a generational low for unemployment,” said NAHB Chairman Randy Noel, a homebuilder from LaPlace, La. “Builders are also relieved that lumber prices have declined for three straight months from elevated levels earlier this summer, but they need to manage supply-side costs to keep home prices affordable.”

Lumber prices are falling because supplies are rising, with an approximately 5 percent gain in the first four months of this year, according to Robert Dietz, NAHB’s chief economist. There has also been some relief from a Canadian rail car shortage as well as softer housing data over the summer.

Of the index’s three components, current sales conditions rose one point to 74, and sales expectations in the next six months increased one point to 75. Buyer traffic saw the largest gain, up four points to 53, crossing the line into positive territory.

Despite the uptick in buyer traffic, sales have weakened for much of this year for both new and existing homes. There is strong demand, but steep price increases have knocked some buyers out of the market.

“Favorable economic conditions and demographic tailwinds should continue to support demand, but housing affordability has become a challenge due to ongoing price and interest rate increases,” Dietz said. “Unless housing affordability stabilizes, the market risks losing additional momentum as we head into 2019.”

Mortgage rates are now up more than a full percentage point compared to a year ago, weakening affordability further. Rates made their largest jump in the last two months and continue to move higher.

Builders should benefit from a still-lean supply of existing homes for sale. However, newly built homes come at a price premium, and builders are still largely focused on the move-up market, although some are starting to build more entry-level homes. Higher prices for land, labor and materials make it difficult for builders to profit off the least expensive homes.

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