Editor’s Note: Forbes Advisor may earn a commission on sales made through affiliate links on this page, but this does not affect the opinions or ratings of our editors.
According to the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau, new home construction hit a wall last month, falling 9.5% from the previous month in April. This is because the supply of homes for sale continues to lag and the cost of materials to build a home remains at record highs.
The housing stock remained around the two-month supply margin in February and March, which is well below the six-month benchmark required for a balanced housing market. But the drought in housing availability has not stopped buyer demand, driving house prices soaring and creating an unsustainable market for potential homebuyers across the country.
In other words, this construction slowdown is the last thing today’s housing market needs.
“We continue to see a trend of rising property prices driven by insufficient housing stocks in our presence and across the country,” said Sherri Calcut, President of BOK Financial Mortgage. “With home prices rising and mortgage rates rising from the all-time low in 2020, we see an impact on the affordability of residential real estate. However, buyers are still very active in our markets, we just don’t have enough stocks. “
Builders and buyers are faced with higher prices due to the construction costs
For builders, this means rethinking their business processes so that their profits are not diminished by the enormous cost of materials. And for homebuyers, it means getting a good one Real estate agent to review your contract – otherwise, you could face enormous and unexpected costs as the prices of lumber, copper, drywall and other materials go up.
In certain cases, this means that as a homebuyer, you can purchase part of the construction costs in advance.
When Brian Walsh, senior manager of financial planning at SoFi, made a down payment last fall to build a new home (which will be ready in July), he was able to close the total cost of construction. Timber prices have more than doubled since then, but Walsh wasn’t responsible for the price difference. Instead, the builder has to cope with this loss of profit.
“We recently considered upgrading, but when the builder put the price on it, which was so high, we decided against it,” says Walsh. “I looked at how much this upgrade would have cost us if it had been included in the original contract and it had been about 20% less.”
Many builders mitigate the risk of rising material costs by adding construction risks to their contracts for price increases. Buyers who agree to terms that include price increases could face higher costs later than planned.
And then there are people like Mickeal Soliman, the CEO of New Jersey General Contractors and Builders, who don’t even take on new customers while material prices stay at such high levels.
“Wood is so crazy, I don’t sell a house until it’s finished,” says Soliman. “When you tell people that the cost of building them will go up because the price of wood is going up, they start asking questions and worrying. It is not worth. Now we’re just building new houses and the price is the price when it’s finished. “
Astronomical wood prices are a hindrance to construction
Timber prices picked up speed at the beginning of the year and then skyrocketed until May, which drove up construction costs. Wood futures – a type of contract that allows people to buy or sell commodities at a certain price at any given time – was hovering around $ 700 per thousand board feet in late January. By May it had doubled to around $ 1,400. On Wednesday, the wood futures closed at $ 1,327, down about 20% from the highest closing price of $ 1670.50 in the past two weeks.
Since that record high on May 7th, prices have slowly fallen. But whether the recent decline is indicative of a bearish trend is unclear, says Andrew Goodman, CEO of Sherwood Lumber in Long Island.
“In the past six days there has been a major turning point in the future of wood. It’s fallen 20% from record highs and no one knows how much more is going to fall, ”says Goodman. “In the historical run-up to prices, there is still a lot of price decline. It’s only a matter of time.”
How long it will take the wood industry to catch up with demand by increasing supply and even building sawmills, which will reduce wood costs, can only be guessed at. Experts do not expect any significant decline in wood prices in the foreseeable future, as the feverish demand will likely continue into next year.
“In the case of building materials, be it timber, household appliances or drywall, the supply-side problems are likely to persist until 2022 and demand will also remain strong,” says Robert Dietz, chief economist at the Federal Association of Building Owners.
Should I build my own home despite rising costs?
For frustrated home buyers struggling with a lack of options to sell their homes, building a home seems like the best option. Such was the case with Brian Walsh and his family who wanted to be in a specific school district in Grand Rapids, Michigan. Walsh says the options were so limited it just made sense to build.
While he says the decision was ultimately the best for her family, there were some downsides, such as: essentially two households at the same time. This is where his background in financial planning came into play. Walsh insisted that they would not go over budget, despite the temptation to throw in a $ 100 upgrade here and therethat can add up quickly.
“With new buildings, you can’t just do everything that is on the wish list,” says Walsh. “We had a budget in mind and I wasn’t ready to go over the budget, so we’re going to do some things ourselves.”
Whether or not people should wait for the cost of materials to start building is something most experts say is a personal decision based on a number of factors, including your budget and how long you plan to stay in the house.
The advantage of the current market is extreme low interest rates, whereby the construction costs can be offset. But it can be foolish to try to time the market in hopes of getting both low rates and low construction costs.
The danger of waiting on the edge for prices to fall is that you wait too long and end up paying higher interest rates and higher construction costs. Nobody can predict exactly what might happen in a year or two. There could be a surge in new homes entering the market when the forbearance program expires and buyers are forced to sell, or the surge may never happen in the near future.
Instead, prudent buyers should consider their budget and whether they plan to stay in the home long enough to build up equity to make a profit on reselling. Depending on the cost of the house, this can take anywhere from five to seven years on average.
Finally, you’ll work with an experienced real estate agent and lender who can guide you through the process. Building a new home requires extra cash and careful planning. For example: are you going to buy an existing development that has utilities? Or are you going to buy land outside of an established neighborhood (which can lead to completely different decisions and potential problems)?
Problems like this are best solved with an experienced real estate expert at your side.