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Builders wary about spring 2022 market

By Bay Equity

With the apparent end of the coronavirus pandemic’s restrictions, builders across the nation can expect plenty of home shopper foot traffic during the 2022 spring sales season.

But the National Association of Home Builders’ (NAHB) monthly confidence index fell in March, even as the industry began ramping up production the month prior.

The overall confidence reading of 70 is still on the positive side, lying well above the break-even point of 50. But expectations for single-family homebuilders have dropped 10 points in the last 6 months to the lowest for this metric since June 2020.

The U.S. Census Bureau said residential housing starts, shot up by more than 100,000 units to 1.769 million year-over-year, a 6.8% gain from January and 22.4%more than February 2021. Builders had a backlog of 265,000 permits at the end of the month.

So far this year builders have begun construction on 243,800 housing units, 12.2% more than by the end of February 2021. More than 1.58 million units are currently under construction.

While low existing inventory and favorable demographics continue to support strong buyer demand, mortgage rates are likely to continue up after Federal Reserve made its first of several expected baseline rate hikes March 16.

But the recent jump in mortgage interest rates is just one of many reasons for builder reticence.

The National Association of Realtors (NAR) reports the recent rise in interest rates may have already knocked some buyers out of the market.

Existing home sales dropped 7.2% in February, much more than expected. Even so, prices continued to rise, up to a median of $357,300, or 15.5% year-over-year.

Builders completed 93,800 housing units in February, well below the 103,000 to 127,300 completions in the last 10 months of 2021. Perhaps these numbers are illustrative of the supply chain issues that have plagued the industry throughout the pandemic.

Skilled labor shortages have been an issue for at least a decade for the home construction industry, but as the market fizzled away at the start of the pandemic, many builders made the choice to lay off more workers.

As such, they were woefully unprepared when demand suddenly surged. With higher costs come razor-thin profit margins, and builders can’t afford to fill the demand for lower-cost homes.

The gap between supply and demand is widening. The U.S. is short more than 5 million homes, an increase from the 2019 gap of 3.84 million, according to new research from Realtor.com.

Homebuilders would have to double production pace to close the gap in five to six years.