NAHB’s Robert Dietz talks homebuilder confidence

Victoria Jones: Hello HousingWire listeners. Today I’m joined by the National Association of Home Builders chief economists, Rob Dietz. Listeners, today Rob will be speaking to us about the latest housing market index report. Rob, thanks for joining us again on HousingWire Daily.

Rob Dietz: Yeah, thanks for the invite. It’s good to join you.

Victoria Jones: Yeah, absolutely. Well, I wanna get started by discussing the latest housing market index from NAHB. According to the report, homebuilder confidence in the market for newly built single family homes fell 2 points to 81 in June, resulting in homebuilder confidence falling to its lowest level since August 2020. So I’d like to get your insight on what this drop in the HMI tells us about market conditions at this time.

Rob Dietz: Yeah, so the NAHB Wells Fargo Housing Market Index peaked at a level of 90 last November. And since that time, it has declined, as you noted, to a level of 81. I think it’s important to keep in mind anything above a level of 50 is a positive reading, indicating market expansion for single family construction. But the recent decline is really due to building material constraints.

So overall, housing demand is strong, inventory is limited. But it is becoming more expensive and taking longer to build all kinds of housing. In fact, residential construction costs were up more than 19% over the last year. And that’s just the materials. So we expect all forms of construction to grow this year, single family, multi-family, and remodeling. But buyers and renters will need to be patient as additional supply comes to the market.

Victoria Jones: Yeah, we’re gonna talk about supply constraints in just a few. But as we approach the summer months, do you expect homebuilder confidence to increase or decline, and what are some of the challenges builders may be facing in the months ahead?

Rob Dietz: Well, I think the new term future is mixed in terms of some of the outlook. On the positive side, lumber prices do appear headed lower. We still need improvements for the overall supply chain, including the availability, the cost of appliances and other kinds of building materials. Delivery times are key. And of course we need to see an end to some of the unsustainable growth and construction costs. And that’s certainly what the Federal Reserve is banking on in terms of its expectation in some of the recent inflationary pressure is transitory, that we need to see an end to some of this kind of price growth.

On the more negative side, we do expect interest rates to head higher over the next two years. And of course, we know that the current pace of home price growth right now is ultimately unsustainable. It’s not a bubble. The market’s frothy. But it is increasing too fast relative to incomes, which does suggest challenges to housing affordability, which would have an impact on homebuilder confidence.

And of course, let’s not forget the existing constraints for labor and lots. For the last four or five years, we’ve been talking about the five Ls of home construction, a lack of labor, lots, lending for homebuilders and land developers, legal issues in terms of regulatory burdens, and of course, challenges with lumber and materials. So lot supplies right now are low in particularly in hot markets. And job openings in the overall economy have reached 9.3 million open jobs. And within the construction industry, we’re short about 300,000 workers. So there’s a lot of jobs that need to be filled. And those represent some of the near term challenges for home construction.

Victoria Jones: Yeah, that’s really interesting. Thank you for answering that. You know, excuse me, as we’ve seen over the last year, surging homebuyer demand, coupled with rising lumber costs and supply constraints, have contributed to an incredibly competitive housing market. So in your perspective, what does the housing industry need to do to meet this home building demand?

Rob Dietz: Well to put it simply, we’ve got to find ways to bend the cost curve for construction. And that’s a lot easier said than done. Policy makers can help. We can find ways to reform inefficient zoning rules, and reducing permit approval delays. All of that would help increase the speed of home construction. We can reduce impact fees, and use more bond financing to develop infrastructure, which is often paid for by home construction. Of course, we need to enable middle skills worker training for sectors like construction to fill those open jobs that I mentioned earlier.

And of course, we’ve got to improve the supply chain for the overall construction industry, including looking at the lumber market, and trying to determine why we sometime obtain this mismatch between demand and available supply when it comes to building materials. And I think one area there where we can see an improvement would be to obtain a new soft with lumber agreement with Canada. Canada is where we get about 30% of our lumber supply.

And let’s keep in mind there’s a race that’s on at the local level. And communities that can find ways to add housing will experience population and job growth. And in fact, due to telecommuting, we think about 30 to 40% of workers will be working at home on at least a part time basis. And thus, those communities have a greater ability to provide supply, will be able to meet those residents who now have a greater ability to choose where to work, and where to live, thanks to a reduced total weekly commute.

Victoria Jones: All right, well let’s focus on our country’s housing inventory, as this has been a question of concern now for over the last year. Recently, the Wall Street Journal reported lumber prices were declining. If lumber prices continue to fall, and supply constraints ease up, what impact will these factors have on the housing market and our nation’s inventory levels?

Rob Dietz: Well, it’s good news. And let’s hope it represents true gains for lumber supply. I think that was the concern in the marketplace was the actual availability of lumber and other kinds of building materials. The challenge in 2020 was that lumber production in the United States was flat, while single family construction was up 12%, and there were gains for remodeling, and other kinds of construction. So you had this mismatch between the demand and supply of lumber. In fact, we had estimated that those higher lumber costs alone were responsible for raising new home prices by about $36,000 per home. So that has clear negative impacts on housing supply, and of course, housing affordability.

We, at NAHB, surveyed homebuilders about these higher costs. And we found that about 20% of builders were limiting sales or construction activity in order to manage their supply chains. And about 15% of builders actually reported pausing some building projects in cases where they laid a foundation but did not proceed to frame the home due to those higher costs. So lower lumber costs and greater availability of building materials in general do mean that we would get an additional short term boost in building. And we certainly could use the additional inventory in the marketplace right now.

Victoria Jones: Yeah, definitely going to be keeping an eye on those lumber prices. Well, a lot of great insight here today, Rob. But lastly before we go, is there anything else that you’d like to add today, or anything else our listeners should know?

Rob Dietz: Well, I think that the big housing data story of 2020, and it was something that my team and I have spent a lot of time researching, was about the shifting geography of housing demand. We saw a notable suburban shift in terms of construction permits. Urban core areas and large metropolitan areas were up about 9% last year in terms of single family construction. But medium sized cities, lower density, lower costs markets, were up about 16%. So a greater growth rate. And lower density second home markets were up 23%. So the lower density type locations saw a greater growth last year. And as the economy reopens, we think some of that demand is gonna move back into some of these higher density markets. In fact, the townhouse construction market at the end of 2020 had the best quarter in two and a half years. And we expect multifamily construction to experience growth here in 2021 after a decline last year.

So the geography story of housing demand continues to evolve. I do believe there will be a partial persistence in terms of some of that suburban shift within metro areas. And we’ll have to watch both the single family and the multifamily markets as they move later into 2021.

Victoria Jones: Okay, well thank you again so much for your time today. We appreciate it. And thanks for joining us on HousingWire Daily.

Rob Dietz: Great, thank you Victoria.

Victoria Jones: Absolutely.