Homebuilders' Optimism Wanes Amid Tariff Concerns and Rising Costs

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell to 42 in February, marking a five-point decline from January and the lowest reading in five months. Economists had anticipated a figure of 46, as per Bloomberg data. A reading below 50 indicates a pessimistic outlook among homebuilders.

"While builders remain hopeful for pro-development policies and regulatory reform, uncertainty surrounding policies and cost factors have led to a readjustment of expectations for 2023, as reflected in the latest HMI," said NAHB Chairman Carl Harris.

One significant cost concern is the Trump administration's executive order imposing 25% tariffs on imported steel and aluminum, which is expected to take effect in March. According to the NAHB, this could increase residential construction costs.

The tariff announcement follows Trump's decision to temporarily suspend tariffs on goods from Canada and Mexico. "With 32% of appliances and 30% of softwood lumber originating from international trade, uncertainties over the extent and scope of tariffs have further elevated cost concerns among builders," noted Robert Dietz, NAHB's chief economist.

Persistent high mortgage rates continue to challenge homebuilders. Data from Freddie Mac indicates that the 30-year fixed mortgage rate remains around 7%, dampening demand. The NAHB survey revealed that 26% of builders reduced home prices in February, down from 30% in January and the lowest percentage since May 2018.

Sales incentives were offered by 59% of builders in February, a slight decrease from 61% in January. Dietz believes that "the use of incentives could weaken as a sales strategy, as higher interest rates limit the number of eligible homebuyers."

The survey reflected a decline in builder confidence, with the gauge measuring sales outlook over the next six months falling by 13 points to 46, its lowest level since December 2018. The gauge for prospective buyer traffic declined by three points to 29. The NAHB index of current sales conditions dropped four points to 46.