Can new construction help keep home prices from rising?
As home prices have steadily climbed over the past few months—fueled by low mortgage rates, motivated buyers looking for more space to wait out the pandemic, and a lack of homes for sale—we’ve been waiting for new construction to settle the market down. And waiting. And waiting.
It’s not for lack of trying, as builder confidence is high and single-family housing starts (i.e. the beginning of new residential construction projects) have been picking up for the last few months. But while this would be a perfect time for the construction industry to add more homes to a market hungry for places to buy and drive prices down, that’s not happening as quickly as many experts would like.
Construction hit hard by pandemic
Why the delay? The industry was hit particularly hard by the pandemic. Not all of the challenges facing new construction are related to that, however. Some of the obstacles that are slowing down new home construction have been around for years, while other challenges are relatively new. What they all have in common is that they all have been exacerbated by the effect that COVID-19 has had on the country and economy.
The year started out strong
According to a report from Deloitte, the construction industry was poised for a strong year at the beginning of the year, adding more than $900 billion to the economy in the first quarter of 2020 and employing 7.64 million people in February—both figures at their highest levels since the 2008 recession.
Pandemic's Impact on home construction
Then COVID-19 hit, and the industry lost $60.9 billion in GDP and total jobs shrunk to roughly 6.5 million. That pushed the industry back (which includes commercial construction in this report) to where it was two years ago in terms of GDP while also eliminating four years of job gains.
Material costs skyrocket
The biggest reason for the muted impact of new construction is that material costs have skyrocketed. Lumber mills severely reduced production at the beginning of the pandemic, while we also saw an unexpected increase in demand for lumber from homeowners and DIYers who were now stuck in their home with time to work on it.
When new construction picked up again in the late spring of 2020, lumber mills were at reduced capacity due to physical distancing limits placed on their workers. And to make matters worse, the Trump administration’s 20% tariffs on imports from Canada (where the industry receives up to a third of its lumber) also added to the costs.
The National Association of Home Builders estimates that lumber prices rose a staggering 250% from April 2020 to April 2021 and added an almost unbelievable $36,000 to the price of a new home.
It’s not just lumber, either. Home appliances are in short supply, from refrigerators to washing machines to microwaves. Even a material as mundane as oriented strand board has seen it price increase by more than 500% since January of 2020.
Long-standing obstacles
In addition to material concerns, the construction industry has struggled with several issues for years, and the pandemic hasn’t helped.
- Lack of workers
- Lack of buildable lots
- Too many regulations
Lack of workers
Finding enough skilled construction workers has been a problem for the industry for a long time. Ed Brady, CEO of the nonprofit training group the Home Builders Institute, recently told MarketPlace, “Before COVID, there were 250,000 to 300,000 empty jobs in our industry.” Replacing them is not easy because most of these jobs require extensive education and training.
Lack of buildable lots
Finding a place to build the new homes has also been a concern for some time. In a survey released by the National Association of Home Builders at the beginning of this year, before COVID reached our shores, 58% of home builders said the supply of lots was low or very low.
Too many regulations
Many municipalities throughout the country have regulations that home builders say slow new home starts. Many would like to see some of them eased so that they can speed up construction and cut down on prices. The NAHB has stated that the cost of governmental regulations, usually at the local level, can account for 25% of a new home’s price.
In June of 2019, Federal Housing Finance Agency Director Mark Calabria, speaking at the Innovative Housing Showcase, said “One of the biggest factors driving prices up and dragging supply down is the accumulation of burdensome government mandates and fees, zoning and land-use restrictions, environmental regulations, building codes, and permitting requirements.”
Reasons for optimism
The good news for buyers and agents waiting for new construction to add some energy to the real estate market is that builders are racing to catch up. Single-family housing starts have recovered from the initial drop-off at the start of the pandemic to remain as high as they’ve been since 2007.
There may be help coming from Washington D.C. as well, as the National Association of Home Builders (NAHB) and the National Association of Realtors (NAR) are pressing Congress to make changes that will help new home construction. This includes fixing the supply chain of materials needed to build homes, improving the Low-Income Housing Tax Credit and restructuring other tax incentives.
“Progress must be made on all fronts to ease the supply-side challenges that are holding back housing production,” NAHB president Jerry Howard said in remarks before Congress.
Typically, new construction lags behind increased demand simply based on how long it takes to build homes. But demand has been high for a while now, and everyone seems to understand the importance of increasing the housing inventory. And despite the challenges caused by the pandemic, help seems to be on the way.