Homebuilder confidence dropped two points in June according to the National Association of Home Builders Housing Market Index. June’s index reading was 64, which indicates strong sentiment among home builders for current housing market conditions.

NAHB component readings also dropped in June with builder confidence in current home sales one point lower at an index reading of 71. Home builder confidence in home sales conditions over the next six months dropped two points to 70 and builder confidence in buyer traffic was one point lower at 48. Buyer traffic readings seldom exceed the NAHB benchmark reading of 50. Index readings over 50 indicate that most builders have positive sentiment toward conditions surveyed.

Home Builders Cite Ongoing Concerns and Growing Worry Over Tariffs

Home builders surveyed for June’s Housing Market Index cited continued concerns over shortages of labor and buildable lots, but also worried over increased materials costs resulting from recent tariffs. Analysts said that high demand for homes is driven by a current shortage of several million available homes; demand should be driving builder sentiment and housing starts much higher than current levels. Builder sentiment reported in the Housing Market Index typically drove housing starts, but this hasn’t been the case in the aftermath of the housing crisis. Severe shortages of homes for sale drive home prices up; this creates competition between buyers and sidelines first-time and moderate income home buyers.

While buyer traffic is robust, headwinds including high home prices and concerns about general economic conditions could be keeping would-be buyers on the fence. Low mortgage rates, which may drop further if the Federal Reserve lowers its key lending rate, could prompt more buyers to enter the market, but rapidly rising home prices in recent years have caused would-be buyers to hold off on buying homes. Faced with few options and high home prices, buyers may be waiting until more homes come on the market. Industry leaders have long said that building more homes is the only way to resolve the shortage of homes and high demand from home buyers.

Faced with rising materials costs and strict zoning rules, builders are tasked to find affordable housing solutions when fewer buildable lots and zoning rules discourage higher density affordable housing developments.

The National Association of Home Builders reported the highest builder confidence reading in seven months for May. May’s reading exceeded expectations for an index reading of 64 and rose three points to 67.

Component readings for the main NAHB reading were also higher. Builder confidence in current housing market conditions rose three points to 72; confidence in housing market conditions for the next six months rose one point to 72 and the reading for buyer traffic in single-family housing developments rose two points to 49.

Any reading over 50 indicates most builders are positive about housing market conditions, but the reading for buyer traffic is often lower than 50. May’s reading suggests that builders were expecting solid buyer traffic as the peak home buying season started. The average NAHB Housing Market Index reading for 2018 was 67; 2019’s average reading is 62.

March housing starts were the lowest in two years. Lower mortgage rates could increase demand for homes and possibly compel builders to ratchet up construction, but there are no guarantees that low mortgage rates will hold steady over the long run.

Builders Cite Ongoing Obstacles Including Tariffs And Labor Costs

Home builders continued to experience higher materials and labor costs. Tariffs were cited as a cause of higher materials costs that are passed on to buyers by raising home prices. While would-be buyers may enter the market due to lower mortgage rates, higher home prices are likely to sideline first-time and moderate income buyers who are concerned with affordability and strict mortgage qualification requirements.

Freddie Mac reported that based on its survey of recent buyers, about 16 percent of recent home buyers relied on seller assistance. While seller contributions to home buyers are carefully regulated, this type of transaction can help buyers get into a home without spending their last dollar.

Rapidly rising home prices and buyer competition have skewed housing markets in favor of sellers in high-demand markets, but slower growth of home prices in recent months could help more renters buy homes. Continued trade negotiations and increased tariffs on China could impact housing costs depending on terms of negotiations and tariffs imposed.