Inflation Cools as Builder Sentiment Rises
The following is an excerpt from a recent Eye on the Economy newsletter written by NAHB Chief Economist Robert Dietz.
Data continue to show easing inflation, although certainly not at the rate the Federal Reserve and markets would wish. Nonetheless, signs suggest the Fed is near the end of its tightening cycle, which in turn sets the single-family sector on the path toward a rebound later this year and an outright calendar year increase in 2024.
Consumer prices in March saw the smallest year-over-year gain since May 2021, decelerating for the ninth consecutive month. While the shelter index (housing inflation) experienced its smallest monthly gain since November 2022, it continued to be the largest contributor (60%) of the total increase, less food and energy. Overall inflation was up 5% year over year in March, while shelter inflation was up 8.2%.
The Fed’s ability to address rising housing costs is limited, as shelter cost increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. The Fed’s tools for promoting housing supply are at best limited. In fact, further tightening of monetary policy will hurt housing supply by increasing the cost of AD&C financing. Nonetheless, the NAHB forecast expects to see shelter costs decline later in 2023.
Building material prices, as measured in the Producer Price Index (PPI) data, actually posted a 1% year-over-year decline in March — an indication of an overall slowing economy and an important leading indicator of where shelter prices are headed. That said, some items like electrical transformers remain a challenge for builders. As the shortage of distribution transformers continues, the PPI for power and distribution transformers increased 2% in March. Prices have surged 63.9% over the past two years and declined in just two months during that span. (See chart below.)
Builders remained cautiously optimistic in April, as limited resale inventory helped to increase demand in the new home market. Single-family builder confidence in April rose one point to 45, according to the NAHB/Wells Fargo Housing Market Index. Currently, one-third of housing inventory is new construction, compared to historical norms of around 10%. More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023. Builders note that additional declines in mortgage rates (to below 6%) will further boost demand.
Subscribe for free to Eye on the Economy.
Latest from NAHBNow
Aug 21, 2025
New and Existing Homes Remain Largely Unaffordable in Second QuarterWhile new homes remain largely unaffordable, builder efforts to improve housing affordability paid dividends in the second quarter of 2025, according to the latest data from the NAHB/Wells Fargo Cost of Housing Index (CHI). The CHI results from the second quarter of 2025 show that a family earning the nation’s median income of $104,200 needed 36% of its income to cover the mortgage payment on a median-priced new home. Low-income families, defined as those earning only 50% of median income, would have to spend 71% of their earnings to pay for the same new home.
Aug 20, 2025
Custom Home Building Grows as Broader Housing Market StrugglesAn analysis of census data by NAHB economists shows that custom home building grew 4% in the second quarter of 2025 as high interest rates and home prices suppress demand for traditional spec home production.
Latest Economic News
Aug 21, 2025
Existing Home Sales Rise in JulyExisting home sales rebounded in July as mortgage rates retreated from the recent peak and home price growth slowed, according to the National Association of Realtors (NAR).
Aug 21, 2025
New and Existing Homes Remain Largely Unaffordable in Second QuarterWhile new homes remain largely unaffordable, builder efforts to improve housing affordability paid dividends in the second quarter of 2025, according to the latest data from the National Association of Home Builders (NAHB)/Wells Fargo Cost of Housing Index (CHI).
Aug 20, 2025
Retreat for Single-Family Built-for-Rent HousingSingle-family built-for-rent construction fell back in the second quarter, as a higher cost of financing crowded out development activity.