Unprecedented demand for new homes means product scarcity, higher costs, and longer build times
Over the last 14 months, the housing industry has been dramatically impacted by pandemic-related events. While housing has been a bright spot in the nation’s economy, we are now facing unique challenges that are driving up materials costs and extending building timelines. Because these changes ultimately impact homebuyers, we wanted to share exactly what is happening in housing and related markets, what that means for building a new home today, and when there may be some relief.
Supply and Demand
The dynamic at the base of all the current challenges is a textbook case of supply and demand. There is an incredible demand for new homes right now, and not enough supply of materials to build them. This has led to increased costs and extended build times.
The rising cost of lumber has been the most news-worthy event in the housing industry. About 80% of the lumber used in U.S. home construction is imported from Canada. Many lumber mills, both in Canada and the U.S., were forced to shut down in 2020 due to health concerns.
At the same time, an unprecedented combination of factors – including record low interest rates, newly remote employees and homeschooled children needing more space, and the general desire for people to change their living situations during the pandemic – led to a surge in demand for new housing and home renovations, all of which require lumber and building materials.
High demand and low supply drove costs up exponentially. Lumber prices have risen 240% from a year ago and continue to climb. Today, there simply isn’t enough lumber to meet demand, or the cost is prohibitive for builders, and timelines for new homes are being pushed out indefinitely.
The latest critical building component to face severe shortage is resin. This plastic is used in materials throughout the home construction process – including as a bond to strengthen wood and flooring materials, and in paints, coatings, primers, and sealers. Much of the U.S. production of resin comes from Dallas, which was severely impacted by the 2020 winter storm. As a result, production slowed or stalled while demand continued to rise, resulting in price increases and building delays.
These are only two examples. Product delays and suspensions are affecting everything from concrete, cabinets, and appliances to paint, sheetrock, and lumber. Nearly every line item in a home’s budget is under some type of delay or substitution.
The Impact on New Homes and Homebuyers
The biggest impact has been cost. The cost to build a new home has increased substantially because materials are scarce and more expensive. The National Association of Home Builders (NAHB) has estimated that, based on a $350,000 home, the cost has increased by $24,000 based on lumber alone. That number is subjective to the size of the home.
Builders must substitute products and finishes. In order to keep a new construction home on schedule, on-the-spot decisions must be made when builders are notified that a product is no longer available. Builders are doing their best to inform buyers of changes in specs as soon as possible, but due to the increasing unpredictability in supply chains, they may not be able to guarantee products by name or provide specific colors of product. In some cases, they will not be able to provide the product at all.
Build timelines are longer. Builders are doing everything they can to stay on schedule for builds that have already started. However, product substitutions with little or no notice can cause significant changes to the building process for future homes and lead times can become unpredictable.
Some green building certifications may not be available. As some program-mandated products become unavailable, it may be difficult to obtain ecoSelect, Energy Star or National Green Building Standard certifications. This is not due to the quality or performance of the home – builders may just need to use different products than those specified by these particular programs.
Builders are making hard decisions and finding solutions. Rather than face the uncertainty of supply costs and product availability, some builders are pausing sales until they can provide buyers with a definite cost and/or build time. Many builders have turned to wait lists or lotteries to manage interest. Some, like Homes by Dickerson, are curating unique custom home packages that don’t allow any changes once the contract is written. The goal is to avoid any further delays by including only products and materials that are immediately available, in order to build homes faster and help meet consumer demand.
NAHB is urging Congress to work with domestic lumber producers to increase production, and they propose ending tariffs on Canadian lumber shipments into the U.S. These measures would help mitigate the threat of lumber scarcity. Building – along with its positive economic impacts like job creation and tax generation – could resume again.
As interest rates rise and demand for suburban housing cools a bit, both the production and cost of lumber should stabilize, along with the entire housing industry.