Low mortgage rates should be giving home builders a leg up, but it seems the impact has so far been muted.
According to a new sentiment survey from the National Association of Home Builders, builder confidence has remained about the same for the last six months, despite 30-year fixed-loan interest rates dropping more than 75 basis points over the same period.
Year-to-date, housing starts are 4.9% lower than the first half of 2018, with single-family permits down even more. New home sales have dropped 3.7% since May 2018.
The reason for the declines, despite favorite interest rate headwinds? According to Federal Reserve Chairman Jerome Powell, it’s “a perfect storm” of factors—many of which have trickled down from Washington.
Take material costs, for example. According to a report from the Associated General Contractors of America (known as AGC), softwood lumber tariffs—imposed in late 2017—have added about $9,000 in additional costs to the average single-family home. Steel and aluminum tariffs have increased costs on these materials 19% and 6%, respectively.
Labor shortages have also become a problem—a likely result of stricter U.S. immigration policies. Powell confirmed as much last week in a panel discussion with the Senate Banking Committee.
When Senator Tina Smith (D-Minnesota) asked Powell, “Would you say our immigration policy has something to do with that?”
Powell responded, “That’s what we hear from home builders. That’s part of it, for sure.”
The exodus of skilled workers during the housing crash also plays a role, Powell told the committee.
“What we hear from home builders is a series of factors that are really holding them back and challenging affordability,” he said. “Now you have a shortage of skilled labor, so it’s hard to get people on the job—electricians, plumbers, carpenters and other people—no matter what you pay them.”
According to additional data from AGC, average construction salaries are up 3.2% over the year, but it’s still not easing builders’ ability to find workers.
As Stephen E. Sandherr, the group’s chief executive officer, explains, “Construction firms continue to go to great lengths to recruit and retain workers during one of the tightest labor markets many of them have ever experienced.”
Association officials say immigration reform, along with additional technical education funding in public schools, could start to move the needle.
“The nation’s education system continues to produce too many over-qualified baristas and not enough qualified bricklayers and other craft construction professionals,” Sandherr said. “As a result of these educational imbalances, too many young adults are struggling to pay off college debts while too many construction firms are struggling to fill job positions that pay well and don’t require costly degrees.”
There’s a silver lining, though. While most of these problems aren’t going anywhere soon, most experts don’t expect them to worsen. NAHB’s Housing Market Index predicts a slight improvement in new home sales over the next six months, and the organization’s own chief economist, Robert Dietz, expects suburban markets to see particular growth.
“I think with rates on mortgages having dropped quite significantly over the course of the year, we do expect a turn-up here,” Powell said. “But these longer-run challenges I think are going to be there, and affordability is going to be a challenge.”