Mortgage rates near record lows have resuscitated the residential real estate market, and the nation’s home-builders and their shareholders can be thankful the industry is finally pulling out of a swoon that began seven years ago.
Since reaching a more than two-year low in October 2011, an index of 11 builder shares has surged almost 165 percent, dwarfing a 30 percent gain in the Standard & Poor’s 500 Index.
So what explains three straight months of declining builder optimism? It boils down to companies having trouble obtaining financing, concerns about available land and soaring costs for construction materials, a report today showed.
The National Association of Home Builders/Wells Fargo index of builder confidence dropped this month to the lowest level October. Smaller builders may be bearing the brunt of limited land availability, higher materials costs and financing difficulties.
“The home-builder confidence survey is primarily a polling of smaller private builders,” Stuart Miller, chief executive officer at Lennar Corp., the third-largest home-builder by revenue, said on a March 20 conference call. “Their lowering confidence reflects their limited access to capital and in turn a limited access to lands.”
A quick glance at costs of materials shows growing pains are starting to develop for the market. Prices for oriented strand board, or wood particle board, vaulted 67.8 percent in the 12 months ended in March. Lumber jumped 20.6 percent, gypsum (used in sheetrock) advanced 17.9 percent, and hardwood flooring rose 10.3 percent, according to the Labor Department’s report on producer prices.
Concrete, insulation, window and door frames, siding, shingles and paint are also more expensive.
The rout in commodity prices that began in the middle of last month may provide some relief for home-builders.
The challenge for builders is the ability to keep raising home prices and preserve margins while property appraisals are slow to adjust. Today’s confidence report showed a measure of sales expectations for the next six months improved to a six-year high, indicating builders are optimistic they can continue to raise prices.