Hopeful Homebuyers Face a Perfect Storm

$36,000. What could you do with this amount of money? Purchase a nice new vehicle. Fund a year of college for your child. Give your retirement account a healthy infusion. Or… buy the exact same new-build house today for tens of thousands of dollars more than it cost last year.

The average cost for a new home increased by nearly $36,000 compared to a year ago— who would have thought we’d look back on 2020 with any kind of longing! The fact is, though, that 76% of the Indiana population was already priced out of the housing market. The average new house cost $316,000, making it a dream that was too far out of reach for millions of Hoosiers. An additional $36,000 only adds insult to injury. What is behind this dramatic, and discouraging, increase in cost?

Record-High Building Product Pricing

2021 served up a perfect storm in terms of housing prices: during quarantine, many homeowners turned to improvement projects to fill their time; mortgage interest rates dropped significantly to encourage movement in the market, and homebuilders amped up production in the tail end of 2020.

According to the National Association of Home Builders, lumber costs pushed the price of a new home up by $16,000 by February 2021. When the Association assessed pricing again in August, it had risen to $24,000. Now, here we are at $36,000. Why the astronomical product pricing increase?

Supply and demand. A simple answer to a complex problem, but we’ll start there. Lawrence Yun, chief economist of the National Association of Realtors says, “There was a great fear among sawmills to prepare for a downturn. When home buying surged, they could not open up capacity quickly enough.” Mills could not produce enough lumber to accommodate new home build demands and, of course, the surge of people building quarantine decks, she-sheds, playhouses, additions, etc.

It’s not simply a matter of churning out more plywood and 2x4s though. An army of tiny mountain pine beetles, about the size of a grain of rice, is chewing through British Columbia. They have decimated enough trees to build 9 million homes, and they’ve still got an appetite. Shifting from Canadian mills to those in the South takes time; establishing a mill takes about two years, and lead times for equipment are lengthy.

Why don’t existing mills pick up the slack? They’re trying, but like many trades, they are struggling to find laborers to work the mills and truck drivers to haul logs from forests and finished products to lumber yards.

A perfect storm within a perfect storm.

It’s Not Just Lumber

The jaw-dropping cost of lumber has grabbed the headlines, but there are supply and demand constraints for virtually every building material, including steel and gypsum. Steel has risen by 22% and gypsum by 12.5% in the past year. Although that’s a smaller product pricing increase than we have seen with lumber, it all contributes to the final cost of a new home. And it contributes to further pricing out Indiana residents across all age ranges and demographics.

Robert Dietz, National Association of Home Builders chief economist Robert Deitz says, “In recent months, aggregate residential construction material costs were up 12% year over year, and our surveys suggest those costs are rising further. Some builders are slowing sales to manage their own supply chains, which means growing affordability challenges for a market in critical need of more inventory.”

Dietz adds, “home buyers should expect rising prices throughout 2021 as the cost of materials, land, and labor continue to rise.” Experts predict that lumber prices will regulate and return to pre-pandemic levels by 2023. For many, this is a discouraging wait as they put their dreams on hold.

NAHB Chairman Chuck Fowke says, “[F]irst-time and first-generation home buyers are particularly at risk for losing a purchase due to the cost hikes associated with increasingly scarce material availability.”

Communities Suffer When Housing Is Unachievable

It is not just individuals and families that suffer when homes are priced out of reach; communities fail to thrive economically and socially. Achievable housing delivers a number of critical benefits, including:

• Serving the underserved and making homes achievable for teachers, police officers, nurses, tradespeople… people just like us.
• The ability to build on smaller lots, boost density, and provide a variety of home types (e.g. townhomes, multifamily housing) to meet the evolving needs of community members.
• Creating a second line of business for home builders (value-based housing has a lower margin but faster turn around thanks to the streamlined, efficient processes).
• Enhancing the diversity of neighborhoods and improving quality of life.

Fowke urges policymakers to “take note and find ways to increase production of domestic building materials, including lumber and steel, and suspend tariffs on imports of construction materials.” The NAHB is calling on the Biden administration to “temporarily remove” the stiff 9% tariff on Canadian lumber in an effort to “ease price volatility.”

The Push for Achievable Housing

Action on a national level is imperative — but there is plenty to do closer to home. We will never stop educating Hoosiers on achievable housing and advocating for responsible and equitable housing policies. From the Oval Office and the Indiana General Assembly to city councils and town select boards, we work to provide information and insight to leaders and policymakers.