The impact of higher building material costs will be palpable in real estate, as experts say prices for newly built homes reflect a mix of factors ranging from pandemic-induced circumstances to potential inflationary circumstances.
“The costs are significantly higher,” says Robert Dietz, chief economist at the National Association of Home Builders (NAHB). “The best advice to buyers and renters is to be strategic about how you approach the housing market at this time. “
Rising material prices and supply chain shortages have pushed builders’ confidence in newly built single-family homes to its lowest level since August 2020, according to recent NAHB reports.
Dietz says material costs overall have increased by at least 20% year-on-year, but individual prices for different materials have seen triple-digit growth over the past year and a half.
“That easily adds about $ 36,000 to the price of a single-family home, and probably about $ 120 to the rent for a typical apartment when those costs are fully integrated,” he says.
Challenges for builders
As builders do their best to fix the problem, the sky-high costs of building materials continue to challenge their efforts, leaving some worried about the future of the housing market.
This was the case for Boise builder Steve Martinez of Tradewinds General Contracting.
“At some point, when the market stops, pauses, or cools down, who’s left to hold the bag? Martinez asks. “You have a lot of builders who don’t commit to a contract price with customers, or who are only looking to build specific homes because they don’t know what their costs will be, which takes inventory off the table. . “
As each material has become more expensive, Martinez admits that softwood lumber has been a bigger challenge for new construction.
Sawmills across the country overestimated the decline in demand for housing at the start of the pandemic. As a result, the unexpected surge in demand for building materials amid the 2020 remodeling boom and pandemic relief-induced wealth businesses has blinded businesses.
“Unfortunately, they threw the dice, and they threw them wrong,” jokes Martinez. Housing only exploded after the pandemic, especially in states like Idaho where we had a huge influx of people from out of state who moved away from more metropolitan areas. .
As pandemic-induced factors triggered triple-digit gains, lumber prices have been a problem for builders for the past two or three years due to high tariffs on softwood imported from Canada. .
About 30% of the wood used in residential construction in the United States comes from Canada, which currently has tariffs of 9%. There is a chance that could double, according to previous announcements from the US Department of Commerce.
“Our estimate of the Producer Price Index is about a 6% gain in 2021, but some of those cost pressures should then ease as we approach 2022,” Dietz said. “The reason is that we expect strong growth this year – ultimately additional supply that will help control price growth. “
Builders have made a small dent in the massive deficit contributing to the frenetic selling market, according to Danielle Hale, senior economist at realtor.com®.
“Even though we have seen a bit of moderation in the housing market in response to rising prices, the reality is that there is still a lot of unmet demand from homebuyers… trying to meet this scarcity is the greatest thing we can do. to move the housing market forward right now, ”Hale says.
Housing starts rose 3.6% from last month overall and 4.2% for single-family homes. Year-on-year, housing starts rose 50%.
According to Hale, challenges have increased in single-family home completion rates, which fell below 1 million for the first time this year.
“Builders can start, but these material cost issues make it difficult for them to finish them ultimately,” Hale says.
Price hikes and construction struggles
Economists think it’s a bit too early to tell, but potential increases in inflation this year could add to price growth in the housing market.
“It’s like a waiting period for inflation,” explains Nadia Evangelou, economist with the National Association of REALTORS®. “The Fed has previously signaled that it thought this inflation would be temporary… Even though mortgage rates typically rise when inflation rises, that is not currently happening.
According to recent projections by the Federal Open Market Committee, economic growth and inflation are higher than expected in 2021.
The median estimate of annual inflation fell from 2.4% to 3.4% in March, while the median estimate of unemployment remained unchanged at 4.5%.
Housing demand will likely remain strong in 2021 and head towards 2022, according to Evangelou, who also expects housing construction to ramp up over the summer. While inventory is still low, she anticipates about 10% more for existing home sales and 20% more for new single-family home sales.
It is still unclear whether inflation in the housing market will be short term or long term. Brokers expect it to be somewhere in the middle as the economy rebounds and new stocks enter the market.
“We have seen higher house prices and dramatic price increases, in double digit increases over the past two years,” said Mike Pappas, President and CEO of The Keyes Company in Florida. .
This could bode well for the housing market as a whole, but Papas says buyers will need to watch interest rate increases for a better picture.
“People are wondering if this is transitory or long-lasting inflation,” he says. “There is no doubt that we are seeing in the short term [inflation]. There is no denying that we have not had any short-term inflation or price increases in many areas.
Jordan Grice is the Associate Online Editor of RISMedia. Send him your ideas for real estate news by email at [email protected]