According to two new reports and many real estate updates released last month, surging demand and low supply will continue to push up prices of new construction homes. This firmly puts a damper on expectations after it became known earlier that lumber prices were finally starting to stabilize and even decline after more than a year of price increases fueled by surging demand.

Summary Of The Current Situation

According to a new report released by the NAR (National Association of Realtors) in mid-June, the number of new construction homes that came on the market so far this year has not been nearly enough to meet the growing demand. 

The report also argues that the problem has longer-term roots than most people realize; between 2001 and 2020, the United States built 276 000 fewer homes in an average year than the case between 1968 and 2000. If building over the last 20 years had continued at the same rate as before, there would now have been 5.5 million more homes in the US than there actually are. Considering that the population has been growing steadily, it’s not difficult to see how this could have contributed to the current situation.

The NAR projects around 2.1 million new construction homes would have to become available in the United States over the next ten years to eradicate the current deficit. To put that into perspective: that would be more than the number of homes built yearly during the construction boom the US experienced in the mid-2000s.

The latest real estate updates published by the federal government showed few signs that the housing shortage would get better anytime soon. New building permits dropped by three percent from April to May. While new home starts grew by 3.6 percent compared to the previous month, analysts expected a more significant increase.

The supply problem is not only limited to new construction homes either. According to recent real estate updates published by Harvard University’s Joint Center for Housing Studies, there are currently also fewer existing homes on the market. This will only exacerbate the supply problem and place additional upward pressure on residential real estate prices.

Interior Frame of a New House Under Construction

The Background

When the Covid-19 pandemic broke out during the first part of 2020, it was a totally new phenomenon for a world that had never experienced something like the 2018 flu in more than a hundred years. Nobody knew how it would impact the economy and, more specifically, the housing market. 

Millions of Americans were restricted to their homes, and the closing of large numbers of non-essential businesses caused many people to lose all or part of their income. This prompted many experts to predict that the housing market would go through a severe slump or that it might even crash. 

As predicted, the economy went into recession. In response, many manufacturers, including lumber suppliers, started to cut back production in anticipation of the drop in demand that everyone was expecting.

Very few economists correctly predicted what would happen next. Since millions of Americans had to spend long periods confined to their homes, DIY activity increased sharply. Homeowners started flocking to Lowe’s, Home Depot, and other stores to buy supplies. These retailers didn’t expect a surge in demand, so they ordered additional stock from lumber suppliers. And, says Meyers Research chief economist Ali Wolf, the housing market also unexpectedly started to rebound at about the same time. 

According to LP Building Solutions, a company that manufactures building materials, it experienced extraordinary growth in sales volumes via its retail channels during the first few months of the pandemic. 

After stalling out for the first two months of the pandemic, Wolf added that home sales also came back with a vengeance. Mills began to increase production, but the backlog in production and the surge in demand for new construction homes for sale were enough to push up prices significantly.

Although suppliers tried to fulfill all the orders that came their way during these steep increases in demand, many builders had no choice but to place orders without knowing how much they would have to pay or when the products would become available. This combination of surging demand and insufficient supply caused the perfect storm, and building materials such as lumber prices started to skyrocket. 

According to real estate updates recently published by Business Insider, there has been a whopping 250 percent increase in the composite price of lumber over the last year. This has, on average, caused an increase of $24,000 in the price of new construction homes for sale. Apart from that, there have also been sharp increases in OSB prices.

With all these supply-side issues quite understandably pushing up prices, the surge in demand for housing only served to place further upward pressure on the costs of new construction homes for sale. In November last year, the HMI (NAHB/Wells Fargo Housing Market Index) reached 90, the highest level it has ever been since 1985. 

Robert Dietz, the chief economist at the HMI, ascribed this to low-interest rates, high numbers of prospective buyers, increased housing demand in suburban and exurban markets, and a stronger than ever focus on the home for many people. 

House Model With Real Estate Agent and Customer Discussing for Contract to Buy House

What Can Alleviate Pressure on Home Prices?

In a recent press release, NAR chief economist Lawrence Yun suggested that something dramatic will have to be done to close the current gap between demand and supply in the housing market. 

He suggested that housing supply should be increased by expanding existing tax credits or creating new ones, giving grants or loans to builders who construct new housing, or renovate existing housing in lower-income areas. The NAR also suggested that cities should be given incentives to approve denser zoning. 

In July’s meeting with homebuilding industry leaders, the White House also placed the current housing supply shortage on center stage. Marcia Fudge, the Secretary of Housing and Urban Development, and Gina Raimonda, the Commerce Secretary, met with supply chain representatives from labor unions, loggers, real estate firms, lumber firms, housing advocates, and builders to discuss the current situation. 

During the meeting, builders pointed to ongoing challenges such as insufficient supplies, the high cost of building materials, and a lack of skilled labor as some of the main reasons there were not enough new construction homes for sale.

The US President in March also announced a $2.2 trillion Jobs Plan focused on infrastructure development. It called for the production, preservation, and retrofitting of over two million sustainable and affordable homes. This number included over 500,000 rehabilitated and new homes for moderate- to low-income homebuyers.

The Bottom Line

By now, you undoubtedly know more about the reasons for the current supply shortages in the US housing market than before. If we missed something, or if you would like to learn more about how we could help make owning your dream home a reality, please visit the Mornington Estates website. Or call us right now at 919.918.0003.