Homebuyers could feel the pinch in an already-tight housing market as rising construction costs may lead to pricier homes after the National Federation of Independent Business (NFIB) reported that construction prices rose in February.
The Consumer Price Index came in higher than expected at 3.2 percent on Tuesday, still higher than the Federal Reserve target of 2 percent. The central bank has raised interest rates to a more than two-decade high to slow inflation, which worries small business owners, the NFIB survey showed. The increased borrowing costs have made business investment expensive as loans costs have jumped.
High prices have also made the cost of building homes more expensive. Home prices have gone up amid elevated mortgage rates, making owning a home unaffordable for many households in the U.S. In January, prices shot up by nearly $7,000 as the median price of a sold home was at about $420,000. The average sales price was $534,300, according to government data. High costs of construction could be one reason prices are elevated, along with low supply in a market that is seeing high demand for homes.
The NFIB survey revealed that price hikes were 42 percent higher in February in the construction sector, with 8 percent of small businesses reporting lesser price increases.
“While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates,” Bill Dunkelberg, NFIB’s chief economist, said in a statement.
Builders have been taking advantage of the low inventory of homes, and with the expectation that interest rates may come down at some point this year, they are more optimistic of the sector in 2024, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).
Fewer builders are cutting prices, the data shows, as buyers who are particularly rate sensitive are seeing home loans costs tick down from their peak last fall.
“While mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year,” NAHB Chairman Alicia Huey said last month.
But costs and the lack of enough workers are of particular concerns, the NFIB showed. Job openings were 6 percent higher in February compared to the previous month.
These are the challenges that will likely shape the sector going forward, according to builders.
“As builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages,” NAHB Chief Economist Robert Dietz said in February. “And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year.”
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