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Economic Report: Home builders grow more confident in the face of limited housing supply

The numbers: Home builder sentiment strengthens

Home builders grew more confident for the fourth consecutive month, according to an industry index, reflecting their positive outlook in light of the continued low supply of existing homes for sale.

The National Association of Home Builders’ monthly confidence index rose one point to a reading of 84 in December, the trade group said Wednesday. It represents the highest level for the index since February.

What happened

Two of the three gauges that underpin the overall builder confidence index also experienced one-point increases, including the index that measures current sales conditions and the component that tracks traffic of prospective buyers. The gauge that assesses sales expectations for the next six months remained unchanged for the second consecutive month.

Regionally, it was more of a mixed backed. The confidence index for the northeast rose 10 points on a monthly basis, and in the South the index increased by two points. But the index worsened by one point in both the Midwest and West.

The big picture

Home builders may be enjoying the current sales environment, but it may be fleeting. With the Federal Reserve expected to begin tapering its stimulus measures, which have included purchases of mortgage-backed securities, mortgage rates are expected to increase.

“While 2021 single-family starts are expected to end the year 24% higher than the pre-COVID 2019 level, we expect higher interest rates in 2022 will put a damper on housing affordability,” Robert Dietz, chief economist for the National Association of Home Builders, said in the report.

Plus, production headwinds continue to plague the industry. Sourcing workers and material delays both remain as significant challenges, making it difficult for builders to predict pricing on homes.

What they’re saying

“Apart from the three readings that ended 2020, this also matches the survey high (back to 1985),” Michael Gregory, deputy chief economist at BMO Capital Markets, said in a research note. “Despite construction taking longer to start (relative to permits) and complete (relative to starts), home builders are in a good mood to end 2021.”

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