Skip to main content

Home sales have weakened over the last couple of months and the latest data show potential home buyers may be increasingly discouraged by this strong seller’s market. But that trend may be set to start reversing course with mortgage rates heading lower yet again and homebuilders expectations for the next six months rising.

Declining input costs – particularly for lumber – should bolster homebuilders’ profitability as final prices are forecast only to rise further in coming months. Despite housing starts being relatively high compared to the last decade, the National Association of Realtors recently found that homebuilders are still underbuilding by as much as 60%.

Related ETFs: iShares U.S. Home Construction ETF (ITB), SPDR S&P Homebuilders ETF (XHB)

Though housing starts rose 6.3% to a seasonally adjusted annual rate of 1.643 million units in June, permits for future homebuilding fell 5.1% to a rate of 1.598 million units – an eight-month low. With permits now trailing starts, that suggests homebuilding could slow in the coming months.

However, one mitigating factor to the weak permit data is homebuilder sentiment. Though the National Association of Home Builders’ (NAHB) housing market index dropped to 80 from 81 in the previous month (and down from an all-time high of 90 last November), sales expectations in the next six months diverged from the headline index, rising 2 points to 81.

Lumber Shortage Begins to Soften, New Building Needs to Break Out

Homebuilders may be feeling more confident about sales in the months ahead due to falling commodity prices and mortgage rates heading lower.

Typically, robust housing demand and increasingly thin supply is the perfect catalyst for a breakout in home building. While housing starts are indeed elevated relative to the last decade, the National Association of Realtors (NAR) released a report last month, written by members of the Rosen Consulting Group, that indicated the US is still significantly underbuilding homes, exacerbating an “enormous” gap between supply and demand. As Business Insider highlights, the report notes building would need to increase by 60% to make up for the lack of available housing.

One of the biggest hinderances to a larger uptick in building has been the lumber shortage that has only recently begun to ease. At their peak, front-month lumber futures climbed to an all-time high close of more than $1670 per thousand board feet. That excessive price, which was more than 2.5x the highest ever pre-pandemic price, strangled homebuilders and had been adding $36,000 to the cost of a new home.

Even with lower lumber prices, the Wall Street Journal writes that homebuilders still do not expect to cut list prices on homes as a result of lower input costs. Instead, they will likely continue to collect higher profit margins rather than drop asking prices, which is typical following periods of rising commodities costs.

Lumber has plummeted below the $550 mark in recent days, marking an 8-month low on Monday. That is a scrap of good news for builders, but prices for more specific lumber products have not declined nearly as much. As CNBC notes, the price of oriented strand board, used extensively for wall sheathing, floor underlayment, roof cover and I-joists, is still more than 500% above its January 2020 level.

Per Fortune, increased production at existing lumber mills has now pushed wood production in the US to a 13-year high. Further supply is expected to come onto the market in the months ahead, but…

To read the complete Market Insight, current clients SIGN IN HERE

For a free trial, or to subscribe and become an MRP client today, START A FREE TRIAL

Once you’re logged in, you’ll also gain access to:

  • Our Daily Investment Insights
  • Joe Mac’s Market Viewpoints
  • All of MRP’s Active Thematic Investment Reports
  • MRP’s Entire Research Library