Expensive lumber costs have added $36,000 to the average price of a new home, report finds

construction workers building home
Construction workers build a new Centex home on Tuesday, June 23, 2020, in Houston.

  • Expensive lumber has added to the costs of new houses in a year when all house prices have skyrocketed.
  • NAHB found that soaring lumber costs have added $35,872 to the average price of a new home.
  • Experts are concerned that high home prices will hinder homebuying for many – especially millennials.
  • See more stories on Insider’s business page.

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.

Three months later, that number now stands at $35,872.

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.”

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The hottest month ever for US housing could be just the start of a more sustainable rally

home housing residential construction worker builder
Construction workers are pictured building a new home in Vienna, Virginia, outside of Washington, October 20, 2014.

  • March saw home sales accelerate further and price growth hit its fastest rate since the mid-2000s.
  • The rally isn’t sustainable, but a rebound in building will allow for months of healthy growth, Redfin said.
  • Millennial homeownership is on the rise and should spur the construction of millions of homes per year.
  • See more stories on Insider’s business page.

The US housing boom wasn’t built to last.

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.

UBS EVIDENCE LAB
Source: UBS Evidence Lab.

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.

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