Building Material Prices Might Peak

NAHB chief economist Rob Dietz says significant price declines for building materials will require more than the Federal Reserve’s strategy of increasing the Federal Funds Rate.

Building material prices, which skyrocketed amid a period of intense demand and insufficient supply during 2020 and 2021, have begun to decline or experience moderate price increases. Housing demand has begun to slow as interest rates have increased at the fastest pace in decades, which suggests building material prices may continue to decline. However, NAHB chief economist Rob Dietz said “broader and more significant” price declines for building materials will require more than the “Federal Reserve’s strategy of rising interest rates.”

"Higher interest rates will not produce more lumber, and smaller balance sheets will not increase the production of appliances and materials," he wrote. "In short, while the Fed can cool the demand side of the economy (reducing inflation and growth), additional output on the supply side is required in order to tame the growth in costs that we see in housing and other sectors of the economy," Dietz said in a recent Eye on Housing article.

Thus far, any price-growth declines in building materials have been predominantly the result of a drop in buyer demand. 

Further evidence of this has continually appeared throughout 2022 within each reading of the NAHB/Wells Fargo Housing Market Index (HMI) of builder sentiment. The HMI declined for the six straight month in June, falling to a level of 67 and indicating a growing number of builders are either experiencing or anticipating a slowdown in prospective buyer traffic.

"On the demand side of the market, the increase for mortgage rates for the first half of 2022 has priced out a significant number of prospective home buyers," Dietz said. "Consequently, the market has now passed an inflection point whereby single-family home building is weakening, [and] we expect further declines in the months ahead."

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