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Jan. 23, 2021, 3:46 p.m. EST

Home builder confidence falls amid rising COVID-19 cases, higher prices for materials

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Jacob Passy

The numbers:  The construction industry’s outlook worsened to start the New Year, according to research from a trade group released Wednesday.

The National Association of Home Builders’ monthly confidence index dropped three points to a reading of 83 in January,  the trade group said this week . It was the second consecutive month that the index has dropped, though the reading still remains strong.

Index readings over 50 are a sign of improving confidence. Back in April and May, the index dropped below 50 as pandemic concerns mounted, but months later the index hit a series of record highs.

What happened:  The index that measures sentiment regarding current sales conditions fell two points to 90, while the index of expectations for future sales over the next six months declined by that same amount to 83. The gauge regarding prospective buyers slipped five points to 68.

On a regional basis, the index was down across much of the country. Confidence weakened the most in the Northeast, where the index dipped some six points, followed by one-point drops in the West and the South. Confidence improved in the Midwest, however, rising two points.

The big picture:  A combination of factors drove the decline in confidence among builders. Demand for newly-built homes is still strong. Interest rates remain near historic lows, and there’s a shortage of homes for sale that is pushing more buyers into the market for new homes.

Builders’ concerns mostly relate to issues on the supply side. “A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability,” Robert Dietz, chief economist for the National Association of Home Builders, said in the report.

Additionally, the report cited the rise in COVID-19 cases as a concern. It remains to be seen whether the rollout of the vaccine will spur more interest in home-buying and make it easier for construction crews.

“Developers have become adept and experienced at selling homes virtually, but rocketing COVID cases and deaths aren’t good for confidence,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note, adding that he expects renewed strength in the spring following a quieter winter for the housing market.

What they’re saying: “Builder sentiment is likely to remain strong for now, reflecting positive housing demand,” Rubeela Farooqi, chief U.S. economist for High Frequency Economics, wrote in a research note.

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