As if 2020 wasn’t challenging enough, home builders are seeing new home construction cost increases during the peak season this year. With as much as an 80 percent increase in the cost of lumber over the last four months*.
While the cost of new homes has risen gradually over the last few years, a recent spike in softwood lumber prices has caused an increase of over $16,000 to the average single-family home in just a few months. As of July 2020, the national median home price surpassed $300,000 for the first time ever.
Quickly rising costs and supply chain shortages for lumber and other building materials combined with economic uncertainty because of the coronavirus pandemic might seem like the recipe for a major slowdown in the housing marketing, however 2020 is not a typical year. Pent-up buyer demand coupled with historically low interest rates and limited inventory have combined to create heavy competition for homebuyers hoping to lock-in a low fixed-rate mortgage on a new home.
The NAHB/Wells Fargo Housing Index, which measures home builder confidence, hit an all-time high of 78 in August 2020. That confidence is bolstered by the fact that the supply of new home inventory is currently very low.
Historically low interest rates
According to a July CNN Business article, “The average 30-year fixed-rate mortgage fell to a record low of 2.98% this past week, according to Freddie Mac. That’s the lowest level in the nearly 50 years of the mortgage giant’s survey. The 15-year fixed-rate mortgage dropped to 2.48%.”
Between historically low interest rates and limited inventory on the market, many Realtors and Builders are seeing homebuyers in bidding wars to try and secure a new home even with the new home construction cost increases that have occurred over the last four months.
The price of lumber
*According to a recent NHAB article, “… by the time Random Lengths reported prices on Aug. 21, the cost to builders had risen to $30,470 for the softwood lumber products in an average single-family home, and $11,061 for the products in an average multifamily home. This is a $13,543 (80%) and $5,122 (86%) increase respectively, in only four months.
The sudden spike in lumber prices coupled with the supply chain slowdowns and interruptions because of the coronavirus pandemic have increased the cost and time to build new homes. This has resulted in available inventory on the market shrinking to a three-month supply.
Other Factors Limiting New Home Inventory
Shortage of buildable lots and increased land prices
The lack of buildable lots is one of the largest issues facing home builders and one of the reasons that new home inventory is not keeping up with demand. Many builders don’t have the resources to develop their own land and depend on large developers to create buildable lots. This has created a backlog and increased the cost of new lots.
Increased regulatory costs
Local land use policies have made it more difficult to develop buildable lots and increased regulations have made the lots more expensive. This is leading to smaller lots and homes with higher costs that can make it difficult for builders to deliver new homes at a price the market can bear.
Shortage of Skilled Labor
With approximately 300,000 unfilled construction jobs as of June 2020, new home production has been greatly constrained which is another factor preventing home builders from meeting the demand for new homes. When the recession hit in 2008, many workers left the construction industry for other careers. Fewer young people are interested in construction related careers these days with parents steering them toward technology and white-collar careers.
Even with new home construction cost increases and limited new home inventory, the real estate market is experiencing a buyer’s frenzy this summer as homebuyers look to lock-in a low interest mortgage on a new home.
It is unlikely that new home prices will go down anytime soon, if ever, but the mortgage interest rates will eventually go up. That makes this a great time to buy a new home, even if they are getting harder to find.
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