Home Builder Confidence Reaches an 18-Year High

New home construction is a key driver for the ready mixed concrete industry.

I have preached for years now that sentiment is the biggest driver of our economy. Whether it is consumer confidence, corporate sentiment, or just the general mood throughout America, sentiment drives the ups and downs of the U.S. economy.

So against the backdrop of the political divisions that plague Washington, coupled with the unfavorable aspects of the new tax law that tilts against high-end homeownership as a result of the cap on the mortgage interest deduction and the elimination of the property tax deduction, I was very surprised at a recent report that shows home builder confidence hit an 18-year high in December. It settled back ever so slightly in January, but the general trend continues to be extremely bullish.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) is a metric we follow very closely, much like the Conference Board and University of Michigan Consumer Confidence Surveys, because they are very telling about the mindset of the constituencies they are measuring. In the case of the HMI, builder confidence remained strong in December, as the general feeling is that changes to the tax code will promote the small business sector and boost broader economic growth. Nonetheless, home builders continue to face building material price increases and shortages of labor and lots. In a recent NAHB survey, 84% of builders cited concerns regarding cost and availability of workers as a key challenge for 2018, matching the 84% who cited rising building material prices.

Derived from a monthly survey that NAHB has been conducting for 30 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate the traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good rather than poor.

The HMI gauge of future sales expectations measured 79 in December, a sign that housing demand should continue to grow in 2018. As the overall economy strengthens, owner-occupied household formation increases and the supply of existing home inventory tightens, so we can expect the single-family housing market to make further gains this year.

But the builders polled are quick to point out the challenges they still face in this robust housing market. As I have written about before, the monthly survey includes a set of “special” questions on a topic of current interest to the housing industry. In December 2017, the special questions asked builders about the problems they faced in 2017, and expect to face in 2018.

The report says that topping the list of problems builders continue to face is the cost and availability of labor, a significant issue for 82% of builders in 2017, and one that has significantly grown in importance since 2011. That year, 13% of builders rated labor as a significant problem, followed by 30% in 2012, 53% in 2013, 61% in 2014, 71% in 2015 and 78% in 2016.

The second most significant problem in 2017 was building material prices cited by 77% of builders. In 2011, building materials prices was rated significant by 33% of builders who responded to the survey. That share increased to 46% in 2012, 68% in 2013, 58% in 2014, 42% in 2015 and 48% in 2016. In fact, this issue showed the largest increase by far between builders noting it was a problem in 2016 and 2017. Other concerns, though farther down the list, were the cost and availability of developed lots, which was cited by 58% of builders in 2017, and 62% expect to be a problem in 2018. Both the availability of labor and lots highlight the expected constraints of a recovering housing market. Builders also expressed concerns about impact, hook-up, inspection, or other fees, as well as local and state environmental regulations and policies. Builders also noted the difficulty in obtaining zoning and permit approval as another challenge they will continue to face in 2018.

Interestingly, there is one concern that seems to have fallen off the map altogether in just the past couple of years: financing. Few cite the ability to obtain construction loans as a stumbling block for the industry, a sign that credit policies have eased dramatically since the construction recovery started taking a strong hold a couple of years ago.

New home construction, both single and multi-family, is a key driver for the ready mixed concrete industry, and with strong positive sentiment among home builders, it points to another year of volume growth in the homebuilding segment in 2018.

Pierre Villere Pierre Villere

Pierre G. Villere has been a contributing editor for The Concrete Producer for over a decade, and serves as the President and Senior Managing Partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry. He has a career spanning more than four decades, and volunteers his time to educating the industry through his regular articles and presentations. Contact Pierre via email.

 

By | 2018-01-26T12:49:28+00:00 January 26th, 2018|