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The NAHB/Wells Fargo Housing Market Index fell by three points to 83 for January, reflecting a drop in builder confidence led by rising lumber prices and COVID-19 case numbers. The reading is derived from a monthly survey that the NAHB has conducted for 35 years, and still reflects an incredibly high level of builder confidence, above the pre-2020 survey high of 78.

“Despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems,” says NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Florida. “Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices. They are also concerned about a changing regulatory environment.”

All three major HMI indices fell in January. The index gauging current sales conditions fell two points to 90, the HMI measuring sales expectations in the next six months fell two points to 83, and the measure of traffic of prospective buyers fell five points to 68.

The Northwest took the sharpest dive at the regional level, with a six-point drop in the three-month moving average HMI score, down to 76. The Midwest’s regional three-month moving average HMI rose two points to 83, while the South fell one point to 86 and the West fell one point to 95.

“While housing continues to help lead the economy forward, limited inventory is constraining more robust growth,” says Robert Dietz, NAHB chief economist. “A shortage of buildable lots is making it difficult to meet strong demand, and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability.”