Home-builder confidence fell to lowest level in months in June

Jerry Howard, National Association of Home Builders CEO, joins Yahoo Finance to discuss the homebuilding and housing sector amid rising material prices and supply issues.

Video transcript

ALEXIS CHRISTOFOROUS: Confidence among US home builders fell to a 10-month low in May as rising building materials and supply chain shortages pushed home prices higher, making it harder for some home builders to get loans. The National Association of Home Builders Wells Fargo Housing Market Index dropped two points to 81, down from a recent record peak of 90. We should mention though, anything above 50 is still considered positive.

Joining us now is Jerry Howard, CEO of the National Association of Home Builders. Jerry, always good to see you. So, let's start with that drop in confidence. What's driving that drop right now for home builders?

JERRY HOWARD: Well, you said it. It's clearly the builders are having trouble with their supply chains, everything from lumber to cabinets to appliances. And that is impacting the time it takes to build a house. And the cost increases that are attendant to that are also impacting the builder's ability to get a loan. What I'm worried about is that it's also going to ultimately end up being a problem for the consumers getting their loans as well.

- So, Jerry, we have seen those lumber prices come down quite a bit. Do you think that that might fuel more optimism going forward, especially as some of those raw materials are now far less expensive than they have been in the past?

JERRY HOWARD: Well, first, let me say, we're thrilled to see lumber prices coming down. We think that they were artificially high to begin with, and we're just glad to see it end. However, and why ever it is ending, we're thrilled.

We're hoping that some of the other increases in price were sort of copycat increases. And we're hoping that they'll start to come down as well. Obviously, if that happens, the demand is out there. It's-- the demand has never been higher. If we can start to build housing at an affordable level and we can make sure that all of these finance issues are addressed, yeah, we'll get way more optimistic.

ALEXIS CHRISTOFOROUS: Jerry, I can understand that, you know, you're happy to see lumber prices come down. I think lots of folks are for different reasons, but even though they've come off those recent record highs, they are still high relative to where they have been over the past few years. Do you think that just elevated lumber prices are just going to be the new norm going forward?

JERRY HOWARD: It shouldn't be the new norm. I don't think there's any reason for it to be. Back in the pre-Great Recession era, we were building about 2.1 million units a year and lumber prices were only at about $400 per 1,000 board feet. As compared to now, when we're building less than a million units a year and the prices are what they are.

So, there's something that we think is artificially inflating those prices. We'd like to see them come down even further. I expect that they will.

- Curious to know how long you think that pressure on essentially homebuilder confidence and optimism is going to last, especially, you know, as we do see some of those lumber prices coming down. Do you see it all perhaps an about face in this trend that we saw this month?

JERRY HOWARD: I think it's early to say that I expect to see an about face. There are still other supply chain issues out there. I've talked to, for example, a multinational corporation that supplies components to a house. They're still having trouble getting their product offloaded in the ports on the West Coast.

I talked to a small local cabinetmaker in Alabama, she's having trouble getting employees to come back to work to build her cabinets. And so, there's a delay in that end of it as well. Whether you're a large supplier or a small supplier, global or local, there are supply chain issues that have to be addressed. Policymakers can do something about it. And if they do, then I think you'll definitely see not only a reversal, I think we'll go back up to near record confidence, if all of these things are taken care of.

ALEXIS CHRISTOFOROUS: So, I mean, you talk to these homebuilders all across the country, Jerry. How are they dealing with this environment now? How are they changing their business strategies to deal with the higher prices, to deal with the labor shortages?

JERRY HOWARD: Well, they're putting escalator clauses in their contracts. In other words, I think the lumber for your house is going to cost X. I think the cabinets are going to cost Y. But they might go up to Z and A, and if they do, that clause is in the contract. Unfortunately, those kind of clauses sometimes scare the consumers off and that becomes an issue.

The other thing they're doing is actually delaying sales. Not selling a house until they know that they're going to be able to get the materials, to get the building going, and to get it done in a timely manner. That's a real issue. Some of the larger guys are just not selling until they know they're going to be able to get the materials out there. It's a change in a business practice, but it's one that, at least in the short term, satisfies both the consumer and takes care of some of the builder's issues.

Another thing I've seen them do, in the South, for example, is lay the concrete slabs for the housing and then just not start to frame it until they know lumber prices are coming down. And that one is a dangerous one to me because that indicates potentially a slowdown in the sector, and it's something that we want to avoid.

ALEXIS CHRISTOFOROUS: For sure. All right, look, Jerry Howard, CEO of the National Association of Home Builders. Thanks so much. Your survey was-- was definitely enlightening. Best of luck to you.