The U.S. housing market, which has been a bright spot in the pandemic-battered economy, is running out of fuel.
With buyers eager to take advantage of low mortgage rates, the inventory of homes to buy is scarce. That’s driving up prices and threatening to derail the boom by pushing homeownership out of reach for many Americans.
For homebuilders, the huge demand for housing is an opportunity to crank up construction and solve the inventory crisis. Instead, some are deliberately slowing things down as they grapple with supply shortages, surging lumber costs and intense competition for labor and land.
“It’s smart business,” said Gene Myers, chief executive officer of Thrive Home Builders in Denver. “But that means continued shortages and higher prices.”
After the Covid-19 lockdowns in March brought sky-high unemployment, most builders expected a crash. What they got was a brief pause followed by a crush of buyers armed with the lowest interest rates on record and a burning desire for more space in the suburbs.
Inventory Shortage
There was pent-up demand for housing when the pandemic hit, after a decade when builders mostly focused on the higher-end of the market, constructing fewer, more expensive homes. Recently, they’d shifted focus to cheaper properties for the massive millennial generation now aging into homeownership.
But with higher costs eating into profit margins, builders may once again chase the wealthy who want bigger homes with backyards and home offices. That comes as the inventory shortage has gotten even more acute.
The supply of existing homes, shrinking for years, is at an all-time low. At August’s sales pace, it would take a little more than three months to run out of new homes for sale, the lowest level on record, according to government data dating back to 1963. That’s down from almost six months in February.
New home construction this year will hold steady at just under 900,000, about the same pace as in 2019, according to a projection by the National Association of Home Builders. For 2021, the industry group forecasts that starts will increase slightly but will be held back by the cost and availability of building materials.
Lumber Spike
The trouble for builders is that vacant land takes about two years to be developed, a process slowed by local government regulations. Meanwhile, lumber prices are expected to add $16,000 to the cost of a typical house, according to the NAHB.
They’ve risen because producers idled saw mills in the U.S. and Canada in March and still face timber shortages resulting from a beetle infestation and wildfires, said Joshua Zaret, an analyst at Bloomberg Intelligence.
Homebuilders aren’t the only ones bidding up the price of wood. Quarantined families have been especially busy remodeling during the pandemic. This summer’s hurricanes and wildfires will also add to demand once the insurance checks start coming in.