Rising materials costs, a tight supply of developed lots and a lack of construction labor are squeezing homebuilders and putting a damper on confidence, according to an industry report released Monday.
Builder confidence for newly built, single-family homes dropped two points in April, to 42 according to the National Association of Home Builders/Wells Fargo Housing Market Index, marking the fourth consecutive month of losses. The drop comes on top of another two-point loss in confidence in March. The index is derived from a survey polling builders about their expectations for sales over the next six months, which are then scored. Readings above 50 indicate more builders surveyed view market conditions as "good" than not.
Builder confidence had been on the rise for eight months until January thanks to higher home prices, a low inventory of existing homes for sale, and low mortgage rates. But the industry now seems to be going through what experts characterize as "growing pains" as homebuilders ramp up operations to keep up with consumer demand.
"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," NAHB Chief Economist David Crowe said in a statement.
In the wake of the housing bust and financial crisis, many players in the homebuilding industry –including lumber suppliers and lot developers –scaled back operations. It will take some time for those companies to recovery and increase capacity to meet the growing demands of homebuilders, says Robert Curran, lead homebuilding analyst for Fitch Ratings.
"Good times lead to all of this and follows some significant cutbacks during the downturn in terms of capacity," Curran says. "They can't always upscale activity at a moments notice – especially in terms of timber and other forest products where they have to do planning at the beginning of the year."
The scarcity of ready-to-build-on lots also remains an issue for builders, especially smaller-scale firms that rely on other companies to develop land and build out the necessary infrastructure to connect the area to major roads, water and sewer lines. Many of those firms went out of business as building activity plummeted after the housing bust and have yet to return in great enough numbers to keep up with construction activity. The availability of buildable lots in prime locations has also dwindled, forcing builders to look at land further out from a city center, a drawback for some would-be buyers.
Finding laborers with the right skills has also been a challenge in recent months. When the construction sector tanked, workers fled to other industries for jobs, including the lucrative energy industry in some regions, greatly reducing the pool of available construction workers.
"It's a question of having the right people in specific trades," Curran says. "A lot of those people that were laid off have found other things to do in other industries including the energy sector. There are skills sets they can draw on in things like fracking and they're being paid very well."
These factors all constrain the growth of the homebuilding sector, but they don't completely prevent it, experts say. Builders and industry observers alike expect homebuilding to forge ahead with gains this year as consumer demand for housing remains elevated. Still, the specter of rising mortgage rates could make affordability an issue once again as higher borrowing costs force would-be buyers to scale back their purchase plans.
"If interest rates were to move up sharply that could be an issue," Curran says. "We've had some hefty home price increases in certain markets and if that accelerates that squeezes affordability, too. People would not be able to buy as much house."