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Economic Report: ‘Worker shortages, high prices and limited material availability remain constraints’: Home builder confidence sinks on concerns about future home sales

The numbers: The National Association of Home Builders’ monthly confidence index fell two points from the previous month’s downwardly-revised report to a reading of 79 in March, the trade group said Wednesday. It represents the lowest level for the index since September.

Overall, the index has now declined for four consecutive months, reflecting a multitude of factors that are weighing on builders’ outlook for the housing industry. Nevertheless, scores above 50 on the index indicate that more builders believe that conditions are good rather than poor.

What happened: The underlying index that gauges home builders’ expectations of single-family home sales in the next six months dropped a staggering 10 points to a reading of 70. It represents the lowest level for this metric since June 2020.

The measure of sentiment regarding current sales also declined, albeit by a smaller amount, while the index that tracks builders’ thoughts on the flow of prospective buyers actually improved by two points.

The big picture: The popular spring season for the housing market is kicking off. But even the uptick in foot traffic that traditionally arrives with this time of year isn’t enough to outweigh the factors dimming the construction industry’s outlook.

Inflation is the primary culprit behind builders’ worsening sentiment. Construction costs have risen over the last 12 months. And as the Federal Reserve seeks to ease the run-up in consumer prices, interest rates are rising in response. In a housing market already defined by sky-high prices, mortgage-rate increases are viewed with concern given that they could end up pushing many prospective home buyers to the sidelines as affordability worsens.

“While low existing inventory and favorable demographics are supporting demand, the impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022,” Robert Dietz, chief economist at the National Association of Home Builders, said in the report.

Looking ahead: “Low inventories are supporting building activity, but worker shortages, high prices and limited material availability remain constraints,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a research note.

“Housing market activity always rises rapidly in the spring, but we expect this year’s market awakening to be much less marked than in either 2020 or 2021,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note, citing rising interest rates and tightening lending standards.

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