Soaring Prices for Building Materials May Reduce Housing Market Growth

• Author: Monica Jackson
• Posted: January 26, 2021

Throughout 2020, the housing market proved surprisingly robust. Despite fears the pandemic would lead to a horrible crash, housing prices continued to rise and plenty of new construction was made. In the new year, this trend seems to be coming to a halt. The reason for the residential construction slowdown is actually very surprising.

Costs for Materials Reach Record Highs

After remaining relatively stable for a few years, the pandemic saw a sharp increase in building supply costs. Lumber reached record highs in late 2020, and they do not appear to be going down any time soon. Softwood lumber had the most dramatic increase, but many other types of construction materials are also showing similar patterns. Costs for land, tools, stone, and various other components needed to build a house have soared.

There are several factors contributing to the increase in building material costs. First of all, there has been a big jump in demand. With so many people interested in housing, large amounts of builders were rushing to grab materials. All the added construction has outpaced previous demands for building materials. Unfortunately, most manufacturers are not creating building supplies at the same level they were pre-pandemic. COVID safety measures have decreased productivity for manufacturers, resulting in a massive shortage.

A final challenge has been shipping building materials. With truckers and other shipping providers overloaded with the new demand for online shopping, medical supplies, and other essential goods, it is harder for building material manufacturers to send out their supplies. All of these issues combined to cause jaw-droppingly high prices for building materials.

Builders Less Interested in Constructing New Properties

Due to the rising costs associated with building a new property, many builders are putting the brakes on their development plans. More and more builders are starting to pause construction plans while they look for more affordable supplies. The NAHB/Wells Fargo Housing Market Index, which surveys builders on their interest in development, dropped a sharp 7 points in the past few months.

Builders are mostly wanting to take a break because high costs for materials may cause already slim profits to disappear. Furthermore, there are huge delays in supplies and a bit of a shortage in labor, so developers who are willing to pay high supply costs might still struggle to construct homes. With all the general economic uncertainty, few builders like the idea of risking a lot of money on a project that may take forever and fail to attract future homeowners.

Housing Inventory Numbers Decline

The decline in new construction is leading to major challenges for the housing market. Around January of 2020, there were roughly 740,000 homes for sale. A year later, the total inventory of homes for sale in the US has dipped down to around 380,000. With so few single family homes on the market, prospective homeowners are finding it hard to get a home.

The decline in new construction or current available homes is having several negative effects. Home prices are rising in many parts of the nation, making it hard for people to find housing within their budget. This is creating a sellers market, where desperate buyers have to make a lot of compromises to get a home. Many report settling for older homes with more problems in need of repair, simply because they cannot find anything else on the market.

Areas With the Highest Level of Growth

In all parts of the nation, the housing market is struggling due to the combined difficulties of lowered supply and higher prices. There are a few areas where this problem is particularly bad. The pandemic has exacerbated the trend of urban dwellers moving to smaller towns. Mid-sized cities with a lot of outdoor living and a big tech sector are experiencing massive growth.

According to Zillow, Austin, Phoenix, Nashville, Tampa, and Denver are all likely to be hit especially hard by the increase in housing supply costs. These areas are dealing with a massive number of new inhabitants, yet less builders are able to develop new homes. Ultimately, this may lead to further contraction, with residents finding themselves unable to afford housing.

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