Homebuilder sentiment drops in June due to soaring lumber costs

U.S. homebuilders are thrilled with demand for housing, but they say they are being hamstrung by rising costs for lumber.

Builder sentiment fell 2 points to 68 in June, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The index stood at 66 last June. A reading above 50 is considered positive sentiment.

Builder sentiment has been mostly in the 70s since December, except for one dip in April, when mortgage rates took a sizable jump. This time, the weakness is all about the spike in material prices.

"Builders are optimistic about housing market conditions as consumer demand continues to grow," said NAHB Chairman Randy Noel, a custom homebuilder from LaPlace, Louisiana. "However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017."

Canadian lumber tariffs went into effect last year, but lumber prices continued to soar amid high demand from homebuilders as well as wildfires and a shortage of rail transportation. Prices are up over 67 percent from a year earlier and hit a record high in May, but fell back slightly in June as demand fell off.

Of the index's three components, each lost 1 point. Current sales conditions fell to 75, the component gauging sales expectations in the next six months dropped to 76 and buyer traffic fell to 50.

Housing starts have been climbing slowly but not as much as the market needs. There is a severe shortage of existing homes for sale, and that is pushing home prices higher at a very fast pace, weakening affordability, especially at the entry level. Homebuilders, faced with higher costs for land, labor and materials, are focused mostly on move-up and luxury home construction, as margins are squeezed at the entry level.

"Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead," said NAHB chief economist Robert Dietz. "However, builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed."

Regionally, on a three-month moving average, builder sentiment in the Northeast rose 2 points to 57, while the West and Midwest remained unchanged at 76 and 65, respectively. Sentiment in the South fell 1 point to 71.