The American real estate market, which has been alight point in thean economy in the grip of a pandemic is running out of fuel.
With buyers eager to take advantage ofmortgage rates, the inventory of houses to buy is scarce. This drives up prices and threatens to derail the boom by pushing home ownership beyond the reach of many Americans.
For home builders, the huge demand for housing is an opportunity to restart construction and resolve the inventory crisis. Instead, some are deliberately slowing things down as they grapple with supply shortages, skyrocketing timber costs and intense competition for labor and land.
“It’s a smart business,” said Gene Myers, president and CEO of Thrive Home Builders in Denver. “But that means continued shortages and higher prices. “
After the Covid-19 lockdowns in March resulted in extremely high unemployment, most builders expected a crash. What they got was a brief hiatus followed by a crush of buyers armed with the lowest interest rates on record and a craving for more space in the suburbs.
There was pent-up demand for housing when the pandemic hit, after a decade where builders focused mainly on the high end of the market, building fewer more expensive homes. Recently, they’ve been focusing on cheaper properties for the massive millennials aging now into homeownership.
But with higher costs eating away at profit margins, builders can once again hunt the wealthy who want bigger homes with backyards and home offices. It comes as the inventory shortage has become uniformmore acute.
Furniture ofexisting homes, which have been shrinking for years, are at their lowest. At the pace of August sales, it would take just over three months to run out of new homes for sale, the lowest level on record, according to government data dating back to 1963. That’s down from nearly six months in February.
Newhousebuilding this year will remain at just under 900,000, roughly the same rate as in 2019, according to a projection byNational Association of Home Builders. For 2021, the industry group predicts that housing starts will increase slightly but will be held back by the cost and availability of construction materials.
The problem for builders is that vacant land takes about two years to develop, a process slowed down by local government regulations. Meanwhile, timber prices are expected toadd $ 16,000 to the cost of a typical home, according to the NAHB.
They have increased because producers left sawmills idling in the United States and Canada in March and still face wood shortages resulting from abeetle infestation and wildfire, said Joshua Zaret, analyst at Bloomberg Intelligence.
Home builders aren’t the only ones driving up the price of wood. Families in quarantine have been particularly busy reshaping during the pandemic. Hurricanes and wildfires this summer will also increase demand once insurance checks start arriving.
Slowdown in sales
Builders can keep raising prices to stay ahead of costs, up to a point, said John Burns, an Irvine-based real estate consultant. But some are increasing them as much as 2% per month, he said.
“If it were to last two or three years, we would be very concerned about affordability,” Burns said. “Anytime the prices go up, it’s great for homeowners and bad for the aspiring tenant.”
Homebuilder inventories have climbed in recent months as orders for new homes have skyrocketed. The looming problem is that the demand for housing exceeds supply at a time when construction has become more expensive.
Lennar Corp., the largest builder by revenue, said it was intentionally limiting sales to homes already under construction to avoid buying lumber at today’s high prices. The company says it’s trying to be patient, betting it can keep raising prices to help offset rising costs.
“Sales could have been stronger with a particular focus on volume,” said Stuart Miller, the president of the company, on September 15.call for earnings. “At most, it is difficult to increase production significantly in this market where labor is limited, and it is even more difficult to replace eligible land.”
Alan Gerbus, a second-generation Cincinnati custom builder, is already in a hole in a house before he’s even started. He presented a contract to his buyer at the end of June for a $ 800,000 house, but his costs just for wood products jumped by $ 25,000 by the time it was signed 40 days later.
“The lumber supplier said they couldn’t honor this award,” said Gerbus. “I pray that the prices of lumber will start to drop by the time I am ready for delivery.”
Even though builders wanted to move forward, it’s hard to get lumber these days. Robert Pool, co-owner of Main Street Lumber, a family-owned Denison, Texas-based business that sells products to builders, said it had to turn away new customers early in the lumber supply crisis because it wanted to make sure it had wood for its existing customers.
Its price for oriented strand board, widely used for roofs and siding, more than doubled to $ 24 a sheet in March, he said.
“It hurts to say no to someone,” he said.
– With the help of Christopher Maloney