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June 21, 2021

Timber! Look Out for the Increasing Costs of Building a Home in the US

By Liam P. Lynch

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The US housing market continues to show its strength, with both the CoreLogic and Case-Shiller Home Price indices printing year-over-year gains of 12.9% and 13.2%, respectively. One of the major themes when trying to explain the record heights of US home prices has been the lack of purchasable inventory. A history of continuous underbuilding coupled with a growing population of home-buying millennials and transitory baby boomers has created a price-fueling imbalance. However, a lack of existing inventory isn’t the only factor in the home buyer’s plight—growing material costs and supply chain backups are also widening the gap between those seeking shelter and the available housing inventory.

Over the past few months both housing starts and building permits have shown some outsized declines. The most prevalent factor contributing to the downturn is that the price of lumber is through the roof. The National Association of Home Builders (NAHB) recently reported that lumber prices were up 38% in April 2021 alone, which was above an already alarming 20% increase seen in September 2020. The growing lumber prices—recently down from their all-time highs but still significantly elevated on a historical basis—are mostly attributable to insufficient domestic production and large lumber mill curtailments that lasted well into 2020 building seasons. However, it’s not only timber products that are causing the surge in building costs; cement, drywall, plumbing and paint prices have all seen increases ranging from 40% to 120% over the past year. There are various reasons for the surging prices—a harsh winter in Texas, the Covid-related shutdowns of production plants and consumers’ desire to start DIY projects while at home due to the pandemic—but no matter the cause, prices have skyrocketed. The cost increases have reportedly added roughly $36,000 to the average price of a new single-family home, and nearly $13,000 to the price of a multifamily home. While homebuyers already faced fierce competition due to historically low mortgage rates and a post-pandemic move from the city to the suburbs, they are starting to face additional affordability issues.

The recent drop in mortgage rates from the peak of 3.2% in April has provided some aid to the affordability challenges facing borrowers. This is one reason we believe homebuilder confidence remains at historically high levels. According to the NAHB/Wells Fargo Housing Market Index (HMI), which peaked at a level of 90 last November, builders remain positive on the market even amid growing concerns over increasing construction costs. It is also worth noting that the number of single-family homes permitted but not yet started construction continued to increase in April, rising to 131,000 units; this is 47% higher than just a year ago. In addition, overall housing permits increased 0.3% in April to an annual rate of 1.76 million units.

For anyone who has tried to buy a home in the past year, the list of frustrations only seemed to grow. Whether it was the COVID-19 safety and distance requirements at open houses, a lack of inventory in desired neighborhoods or rising prices to compensate for the increasing building costs, it would appear that the supply-side constraints on the US housing market persist. However, as the country continues to move toward a more normal post-Covid state of full production, we do expect to see an opening of supply chains and an easing of construction backlogs. As this happens, the trend of rising home prices should cool off as more supply of both existing and new homes come to market.

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