- Inflation has affected housing construction and has raised prices.
- It is also responsible for the increase of costs and the shortage of materials.
- The home building industry has stood still waiting for a change.
Even in the busiest American housing market in more than a decade, new home construction has become a frustratingly uncertain and expensive endeavor for many home builders.
Rising costs and shortages of construction materials and labor are spreading in the home construction industry, which accounted for almost 12% of all home sales in the United States in July. Construction delays are common, leading many builders to decrease the amount of new houses that they put up for sale. As building a new home has become more expensive, some of those costs are passed on to buyers.
Across the economy, prices soared this year amid shortages of manufactured goods and components, from cars and computer chips to paint and building materials. The Federal Reserve is meeting this week and officials’ outlook on when interest rates might start to rise could indicate how concerned the Fed is about inflation.
Limitations for home builders are unwanted news for home buyers, who already face historically low levels of resale homes on the market and record prices. Economists worry that many first-time home buyers are being shut out of the market. Erosion in affordability is one reason the pace of home sales has slowed in recent months.
The effects of the pandemic
At Sivage Homes in Albuquerque, NM, the builder’s efforts to keep their construction on time are undermined almost daily by delays in everything from plumbing fixtures and windows to bathtubs and appliances. “Today, we could literally sit waiting 30 days, maybe even 60, for one thing or another,” said CEO Mike Sivage. “I’ve been doing this since 1986 and I have to say I’ve never seen anything like it before.”
The pandemic set the stage for higher prices and shortages of construction products. Factories were temporarily idled and are now trying to catch up with production as demand has intensified due to an unexpectedly hot housing market and a surge in home remodeling.
Costs go up
Lumber futures rose to an all-time high of $ 1,670 per thousand board feet in May. Since then, they have dropped to $ 634, about 10% more than a year ago. Still, wholesale prices for a category of home building components that include windows, shingles, doors and steel rose 22% in the past 12 months, according to an analysis of Labor Department data conducted by the Association. National Home Builders.
Before 2020, it was typical for those aggregate prices to rise a little over 1% per year. Those conditions are likely to persist. NAHB chief economist Robert Dietz said builders told him that “there are ongoing and, in some cases, growing challenges with flooring and other types of building materials.” Meanwhile, lumber savings have yet to trickle down to many builders, including Thomas James Homes, which operates in California, Washington state and Colorado.
Much more expensive wood
“The price we pay for lumber today is the same price we paid 90-120 ago,” said Jon Tattersall, president of the builder, noting that his company’s overall construction costs have risen about 30% since November. Homebuyers should also not expect to see any discounts from falling lumber prices, because builders set their prices largely based on overall demand in the housing market.
A signed contract for a home that has yet to be built usually includes an allowance for unexpected construction costs, but generally builders will have to consume large increases and then pass them on to the next buyer. “In the futures, those are the ones where we will have to increase costs,” Tattersall said.
Consequences of inflation
Higher prices for building materials aren’t the only factor driving up construction costs. The chronic shortage of skilled construction workers has worsened during the pandemic, forcing builders to factor in higher labor costs.
Inflation is being felt throughout the economy. Consumer prices rose 5.3% in August compared to the same month the previous year. At the producer level, inflation soared an even more pronounced 8.3%, the highest annual gain on record. The Federal Reserve has said it believes the rise in inflation will be temporary. Yet for now, rising construction material costs and persistent supply shortages are making everything from houses and apartments to commercial buildings more expensive.
Limited home sales
To manage, many builders are slowing down the rollout of new homes. Zonda Economics, a real estate data tracker, estimates that about 85% of builders are intentionally limiting their sales. “They’re trying to make sure they have the land ready, the workers ready, and the materials ready so they can excavate the houses they’ve sold,” said Ali Wolf, Zonda’s chief economist.
Even with inflation, builders are benefiting from the busiest housing market in years. Demand for new homes has strengthened, while the number of previously occupied US homes for sale has fallen to record lows, driving prices up.
The median price of a new home sold in July was up 18.4% from a year earlier to $ 390,500, a record high, according to the Commerce Department. For existing homes, the median price rose 17.8% in July to $ 359,900, according to the National Association of Realtors.
Builders typically hire contractors who handle structure, electrical, plumbing, and other facets of construction. Since these companies have faced higher costs to obtain skilled labor or obtain the materials they need to do their jobs, they have had to pass those increases on to the builders.
No work force
Tri Pointe Homes, which builds homes in 10 states including California, Texas and Maryland, has faced higher labor costs. It has been working through those raises, at times reaching beyond its core group of contractors, CEO Doug Bauer said. One way Tri Pointe and other builders are dealing with product delays is by asking contractors to install temporary fixtures and appliances, for example, so buyers can move in as quickly as possible.
“Then as soon as the original item is available, we will reinstall it,” Bauer said. To stay ahead of rising costs, Tri Pointe has raised home prices and reduced incentives for buyers when needed. Even so, the builder has raised its guidance on the number of homes it expects to deliver this year from 6,000 to 6,300.
While the large publicly traded builders have the means to purchase building materials and store them until they are needed, the smaller builders that make up most of the industry are at the mercy of suppliers.
Sivage, whose company builds homes priced from $ 250,000 to $ 1 million, used to be able to price lumber with suppliers a year in advance. That changed in recent years as demand for wood increased. Now Sivage doesn’t know how much it will cost until it is ready for delivery. “We had to smile and bear it,” he said.
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