Just a few months ago, in February, the National Association of Home Builders (NAHB) released shocking data about how the historic appreciation in lumber prices was crimping the housing market. A newbuild was $24,000 more expensive, on average.
The housing market took off last summer, as the pandemic enabled many to work from home indefinitely, and with mortgage rates so low, many people rushed to buy new homes. But the pandemic shut down lumber production, and it hasn’t kept pace with building since.
“This unprecedented price surge is hurting American home buyers and home builders and impeding housing and economic growth,” NAHB Chairman Chuck Fowke said in a statement. “These lumber price hikes are clearly unsustainable. Policymakers need to examine the lumber supply chain, identify the causes for high prices and supply constraints and seek immediate remedies that will increase production.”
A report from the NAHB in February said the lumber supply chain impact came as factories shut down almost immediately last March for safety reasons, and then as demand spiked, supply couldn’t keep up. Lumber prices have jumped by 340% compared to last year.
Insider reported on March 26 that because lumber prices are so high, home builders have been building fewer homes and intentionally raising prices to keep up with the high demand for houses amidst the low supply of lumber.
In addition, a report from Redfin – a real estate brokerage- found that the average home sale price hit an all-time record in March, increasing 16% year-over-year t0 $331, 590, and with about one in three homes being sold for more than the asking price in February, experts like Redfin Chief Economist Daryl Fairweather are concerned.
“When the pandemic is over, purchasing a home is going to cost much more than ever before, putting homeownership much further out of reach for many Americans,” Fairweather said in a statement. “That means a future in which most Americans will not have the opportunity to build wealth through home equity, which will worsen inequality in our society.”
Insider’s Hillary Hoffower reported on April 30 that the pandemic and the lumber shortage are combining to put homeownership out of reach for many, but especially the millennials entering their prime homebuying years. Fairweather told said the housing shortage is leaving millennials “boxed out of the housing market.”
On March 12, the NAHB, along with more than 35 other housing organizations, wrote a letter to Commerce Secretary Gina Raimondo asking her to examine the lumber supply chain and look into solutions for the high costs.
They said: “Housing and construction can do their parts to create jobs, boost the economy to its pre-pandemic strength, and provide safe and affordable housing for all Americans, but in order to do so the federal government needs to address skyrocketing lumber prices and chronic shortages.”
What began as a hefty uptick in home purchases evolved into an all-out buying spree in a matter of months. Americans taking advantage of low borrowing costs and looking to flee cities for suburbs snapped up homes at a rate not seen since the mid-2000s housing bubble.
It didn’t take long for strains to crop up. Homebuilders struggled to keep up with demand, and lumber shortages cut into construction. The national supply of existing homes fell to a record low in January and stayed there in February, even as the pace of sales slowed. Inventories of US single-family homes now sit 40% lower than at the start of the pandemic, while apartment inventory is down 10%, according to UBS data.
The supply-demand imbalance was most evident in home prices. The national median home-sale price grew at the fastest year-over-year rate on record in March, according to Redfin data published Thursday, which called it the hottest month ever in the US housing market. This extraordinary price inflation now risks making the housing market far less accessible at a time of intense economic struggle.
Potential homebuyers need not worry, Taylor Marr, lead economist at Redfin, said. After the housing’s hottest month in history, stronger homebuilding activity and attractive mortgage rates should help the market settle into a slower and more sustainable expansion, he added.
“Despite the intense competition and high prices we face, I still see more big gains to be made in home equity,” Marr said in the Thursday report. “Waiting for the market to cool could take many months, and at that point we may have missed out on the opportunity to benefit from these super-low mortgage rates and price gains in the year ahead.”
Solving the decade-old problems plaguing the housing market
One factor that should ease pressures on the market is a sharp uptick in homebuilding. Housing starts leaped nearly 20% last month to their highest level since 2006, according to Census Bureau data published Friday. Permits for building residential units also swung higher, albeit at a slower pace. The readings follow February declines linked to harsh winter storms.
Contractors are also growing increasingly confident in market conditions. The National Association of Home Builders and Wells Fargo sentiment index edged higher in an early April reading, boosted mainly by new traffic from prospective buyers.
Still, some lockdown measures are still in place, and lumber prices remain elevated.
“While states have mostly lifted restrictions, demand surges in residential construction and supply chain disruptions have made certain materials scarce, creating long lead times and cost overruns, putting additional pressure on contractors trying to service their clients, pay their employees and still have something left for themselves,” Ben Johnston, chief operating officer of lending firm Kapitus, said.
Firms also have to make up for years of slower building activity. Home construction remained relatively weak for years after the Great Recession as damage to the market left firms desperate to prop up prices.
Those efforts have since come back to haunt contractors. The housing market is about 3.8 million units short of current demand, Sam Khater, chief economist at Freddie Mac, told The Wall Street Journal. That hole would be much smaller had building kept up with demand before the pandemic struck, he said.
“This is what you get when you underbuild for 10 years,” he added.
Transitioning to a cooler, but healthier, housing market
A rebound in supply won’t reverse the market’s expansionary streak. Buying activity will remain robust as the Federal Reserve holds interest rates near zero and the economy rebounds from the coronavirus recession, Redfin’s Marr said.
“Fundamentals like low mortgage rates and high demand for housing are fueling the record-high price gains, so I don’t believe that homes are overvalued,” he said.
Price growth, however, will slow. Supply should balance out with demand in roughly six months as building picks up, Jefferies analysts led by Philip Ng said in an April 8 note.
Lumber prices should also peak over that period. The futures market currently sees the commodity plunging 26% into early 2022. That should cut down on premiums paid for new homes, according to Jefferies.
Contractors also have plenty of warning for a coming wave of fresh demand. Millennials’ homeownership rate shot higher during the pandemic, particularly among those aged 30 to 34. The population of people aged 25 to 34 is about 9% larger than that aged 35 to 44, according to Jefferies. That bigger group’s continued foray into homeownership should drive the construction of 1.7 million to 2 million new homes per year through 2024, the analysts said.
“Underbuilding has left the inventory of new and existing homes for sale at all-time lows, making the only solution to satisfy growing demand from the Millennial cohort to be new residential construction,” they added.
All signs are pointing to a surge of new building. Such a rebound is heavily reliant on lumber supply chains and, as with the broad economy, the path of the coronavirus. If growth cools as Jefferies, Redfin, and current data suggest, homeowners and prospective buyers might both come out winners.
If you live in Illinois and have outstanding student loans, the state could pay off some of your debt to help you buy a house.
The SmartBuy program, offered by the Illinois Housing Development Authority, helps anyone who wants to buy a home in Illinois by paying off up to $40,000 in student debt, or a loan amount equal to 15% of the home purchase price. According to the Chicago Tribune, between the start of the program in December and early April, it has paid off an average of $24,100 in student debt for each buyer, and people from outside the state have even been inclined to move there to make use of the program.
“I’m getting a lot of interest,” Chanon Slaughter, a vice president of mortgage lending at Guaranteed Rate, told the Tribune. “I am getting folks literally saying, ‘I want to move back to Chicago for this program.'”
Along with paying off student loans, the program also provides $5,000 that can be used for a down payment or closing costs.
There are a few catches, though: A buyer’s outstanding student debt must be paid in full at the time of the home purchase, and if the buyer chooses to sell the house within three years of the purchase, they must repay a portion of the student loan assistance. The other catch is that Illinois has allocated $25 million to the program, so it’s only expected to help between 600 and 1,000 homebuyers.
Here are the program’s eligibility requirements, according to its website:
The buyer must have at least $1,000 in student loans;
The buyer’s FICO “mid-score” must be 640 or higher;
The buyer’s income must be under or at the limits for the county where the property is located, which can be found on the IHDA mortgage website;
And the assistance cannot be applied retroactively – the buyer must be buying a new primary residence.
This program has the potential to tackle two simultaneous affordability crises – the $1.7 trillion pile of student debt and the skyrocketing price of the median house since the housing market reopened during the pandemic, exacerbated by a serious inventory shortage. It isn’t the only experimental economic program being offered in Illinois, either. Evanston, a city in Illinois, approved spending on March 22 for a $10 million reparations fund that compensated Black residents through $25,000 housing grants.
Insider previously reported that the average home sale price hit a record high March, and the spiking housing costs have concerned housing experts, like Redfin Chief Economist Daryl Fairweather, who said in a statement that they could be putting homeownership out of reach for too many Americans.
“That means a future in which most Americans will not have the opportunity to build wealth through home equity, which will worsen inequality in our society,” Fairweather said.
Designed to boost the economy during the worst crisis seen in generations, the law provides everything from additional funding for small businesses and vaccine distribution to housing and rental benefits, and a pot of money for state and local governments. An early analysis of the rescue plan indicates the vast majority of its benefits are squarely directed at middle and low-income households.
Beefing up unemployment benefits to $300 a week will help many Americans, but especially the younger workers who have been hardest hit in terms of income loss during the pandemic. The older cohort of millennials in prime child-rearing years stand to benefit from a beefed-up child tax credit that will put up to $3,600 in the pockets of parents. And $1,400 checks will help cover the things millennials struggle with most: living costs like rent and debt.
While critics say the final American Rescue Plan is missing some key initiatives like a federal minimum wage hike and student-loan debt relief, it has overall received widespread support. A new Morning Consult poll found that 75% of voters support the package, including 59% of Republicans.
While it’s a good start, millennials need more to heal their economic wounds; they need solutions to restructure the broken economy they inherited.
Millennials have been facing an affordability crisis
Millennials are a generation of optimistic, hard-working people who have been dealt a bad hand, according to Jill Filipovic, author of “OK Boomer, Let’s Talk,” which explores how boomers created an economic crisis that will leave millennials the first generation worse off than their parents.
“None of this was an accident,” she told Insider back in August. “If we understand where millennials are and how we got here, we can have a better idea of how to fix things going forward.”
The oldest millennials came limping out of the Great Recession with crippled finances, and they were still dealing with its lingering effects a dozen years later, when the coronavirus recession hit.
But these aren’t the only economic forces behind millennials’ economic plight.
A November Deutsche Bank Research report stated that younger generations have been hit hard while older generations have reaped benefits from the economy. Boomers, it said, saw an increased value in assets thanks to low interest rates and inflated housing prices. They didn’t have to pay as much for education as millennials have, nor will they face the cost for environmental damage caused by the carbon emission-releasing companies in which they’ve invested.
Boomers have been questioned by authors like Filipovic and news outlets ranging from Vox to the Guardian for their role in bankrupting the rich economy they inherited, leaving millennials to pick up the pieces. And they’re not actively setting up a framework to fix this.
Neil Howe, the economist, historian, and demographer who coined the term “millennial,” told Insider that boomers refuse to pay for institutional upkeep, preferring to spend money on things that change people’s lives now. He said this is a result of their coming-of-age experience, in which their parents, the GI generation, cared about building strong institutions and looking into the future. Boomers took that for granted and developed a “live-for-today attitude,” he said.
Consider when boomers entered the same life stage millennials are in now, in the 1980s. They supported the increasing financialization of the economy and a massive reduction of taxes, causing financial asset speculation to become both disconnected from and controlling of the real economy, Kurt Andersen, author of “Evil Geniuses: The Unmaking of America,” told Insider in February.
Millennials need a game plan and room at the table
Biden promised to “go big” on a stimulus package, and he delivered with a progressive historic bill that some have likened to FDR’s “New Deal” agenda of the 1930s. As Insider’s Juliana Kaplan wrote, it has the potential to inject the government into American life in unprecedented ways, while Insider’s Ben Winck reported that’s part of $5 trillion in stimulus going back to the early days of the pandemic during the Trump administration.
Putting cash in pockets and fattening unemployment benefits will inevitably be a leg up for many millennials suffering from economic hardships. But it needs to be followed up with longer-term action.
“Millennials would like to see a real game plan,” Howe said, adding that they ideally want to see society move in a more constructive way that ensures their future. The older generation, he said, is more focused on getting through the next six months than investing in a structural solution for the future.
Sen. Elizabeth Warren disagrees, and she was a cosponsor of a tax exemption in the stimulus on student-loan forgiveness through 2025. She argues it sets the stage for student loan forgiveness. While this would wipe out debt for 15.3 million Americans, it doesn’t solve the problem of the rising cost of tuition that leads to such massive student-debt burdens.
But millennials are by and large waiting for a political class from another generation to make these decisions.
Boomers have held tremendous political, cultural, and economic power for the past several decades, Filipovic said. “What millennials need is not just boomers imparting their wisdom and experience, but really making room at the table for us,” she added.
While the number of millennials in Congress rose slightly this year by 1%, they still only make up 7% of Congress with 31 out of 532 voting members, per the Pew Research Center.
“Unless millennials are at the table, we’re really not going to see the issues that are most important to us addressed,” Filipovic said. “You need people who are actually going to live in the future, who have a stake in the future, at the decision making table.”