U.S. builder costs increase, weaken housing affordability

NAHB Chief Economist Robert Dietz
May 11, 2018
By NAHB Chief Economist Robert Dietz
May 11, 2018 - Low inventories of U.S. homes and higher costs of materials continue to have significant impacts on the housing market. For example, the ongoing increase in softwood lumber costs — partly the result of tariffs on Canadian lumber — is harming affordability. As of the end of April, composite prices for framing lumber were up almost 42% since the start of 2017 and more than 58% above prices at the start of 2016. These price increases have added about $6,000 to the cost of a typical, newly built single-family home.

The overall economy created 164,000 jobs in April and the unemployment rate dipped to 3.9% — the lowest since 2001. However, labour remains tight for builders and remodelers, despite the housing sector adding 125,500 jobs over the last 12 months. Yet, given the low overall unemployment rate, housing's rate of job growth is likely to slow, causing wage growth to accelerate among a smaller pool of available labor.  

Higher costs for materials and wages are consistent with the U.S. Federal Reserve's current view of the economy, which requires tightening monetary policy. While the Fed held rates constant in April, we expect another 25 basis point increase in June, followed by one or two additional rate hikes later in 2018. Higher rates and increasing home prices will continue to harm housing affordability. But those hindrances will be offset somewhat by income growth, which will enable positive housing demand conditions. 

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