It would seem reasonable to assume that U.S. home builders are feeling pretty good about business at the moment, thanks to the acute shortage of homes for sale right now. However that's not the case, for a sharp increase in the cost of lumber and an expected increase in other costs is having a big impact on their profits, CNBC reported.
The monthly homebuilder confidence index for single family homes has fallen by two points in July to just 64, lower than economists' expectations of 68. Experts consider any score above 50 equates to a positive sentiment, but this is the lowest reading on the National Association of Home Builders/Wells Fargo Housing Market Index since November — before the presidential election.
Following President Trump's election in November builders were generally very confident, as they believed his incoming administration would be "builder-friendly" and remove some of the regulations that have driven up the cost of building homes. Indeed, builder confidence at that time rose by six points between November and December 2016, and climbed as high as 71 in March after the administration repealed some environmental regulations that impacted builders.
However, sentiment is now on the decline after the Trump administration introduced tariffs on Canadian lumber of up to 24 percent. In addition, the government is expected to impose new tariffs on other imported construction materials in the coming months. As such the cost of framing lumber has risen sharply in recent months, in tandem with rising prices for land and labor.
"Builders will need to manage some increasing supply-side costs to keep home prices competitive," NAHB Chief Economist Robert Dietz told CNBC.
Meanwhile prices continue to rise, with the median price of a home sold in May hitting a record $345,000 according to U.S. Census data. Builders say they want to focus more on lower priced "starter" homes to meet demand from younger buyers, but are being handicapped by rising costs of construction. They say that segment of the market is becoming increasingly unprofitable.