Inflation Forces Homebuilders to Take It Slow, Raise Prices
Even in the hottest U.S. housing market in more than a decade, new home construction has turned into a frustratingly uncertain and costly proposition for many homebuilders.
Rising costs and shortages of building materials and labor are rippling across the homebuilding industry, which accounted for nearly 12% of all U.S. home sales in July. Construction delays are common, prompting many builders to pump the brakes on the number of new homes they put up for sale. As building a new home gets more expensive, some of those costs are passed along to buyers.
Prices Have Spiked Amid Shortages
Across the economy, prices having spiked this year amid shortages of manufactured goods and components, from cars and computer chips to paint and building materials. The Federal Reserve meets this week and officials’ outlook on when they might start raising interest rates could indicate how worried the Fed is about inflation.
The constraints on homebuilders are unwelcome news for homebuyers, already facing historically low levels of resale homes on the market and record prices. Economists worry many first-time homebuyers are getting priced out of the market. The erosion in affordability is one reason the pace of home sales has been easing in recent months.
At Sivage Homes in Albuquerque, N.M., the builder’s efforts to keep its construction on schedule are undercut almost daily by delays for everything from plumbing fixtures and windows, to bathtubs and appliances.
“Nowadays, we literally could be sitting waiting 30 days, maybe even 60, for one thing or another,” said CEO Mike Sivage. “I’ve been doing this since 1986 and I have to say I’ve never seen anything like this before.”
Pandemic Set the Stage
The pandemic set the stage for higher prices and shortages of construction products. Factories went idle temporarily and are now trying to catch up on production at the same time that demand has intensified due to an unexpectedly hot housing market and a surge in home remodeling.
Lumber futures jumped to an all-time high $1,670 per thousand board feet in May. They’ve since dropped to $634, about 10% higher than a year ago. Still, wholesale prices for a category of homebuilding components that includes windows, roofing tiles, doors and steel, increased 22% over the last 12 months, according to an analysis of Labor Department data conducted by the National Association of Home Builders. Before 2020, it was typical for such aggregate prices to rise a little over 1% annually.
Those conditions are likely to persist. Robert Dietz, chief economist at the NAHB, said he’s heard from builders that “there are ongoing challenges, and in some cases growing challenges, with flooring, other kinds of building materials.”
Meanwhile, any savings on lumber have yet to filter down to many builders, including Thomas James Homes, which operates in California, Washington state and Colorado.
“The price we’re paying for lumber today is the same price we were paying 90 or 120 ago,” said Jon Tattersall, the builder’s president, who noted his company’s overall building costs have increased about 30% since November.
Prices Largely Based on Overall Demand
Homebuyers shouldn’t expect to see any discounts from falling lumber prices, either, because builders set their prices based largely on overall demand in the housing market.
A signed contract for a home yet to be built typically includes an allowance for unexpected construction costs, but generally builders will have to eat big increases and then pass them on to the next buyer.
“On our future ones, those are the ones we’re having to raise the costs on,” Tattersall said.
Higher building materials prices aren’t the only factor driving up builders’ costs. A chronic shortage of skilled construction workers has worsened during the pandemic, forcing builders to factor in higher labor costs.
Inflation is being felt across the economy. Consumer prices rose 5.3% in August from the same month a year ago. At the producer level, inflation jumped an even steeper 8.3%, the biggest annual gain on record.
The Federal Reserve has said it believes the surge in inflation will be temporary. For now, though, the rise in building materials costs and the lingering supply crunch are making everything from houses and apartments to commercial buildings more expensive.
To manage, many builders are slowing the rollout of new homes. Zonda Economics, a real estate data tracker, estimates some 85% of builders are intentionally limiting their sales.
“They’re trying to make sure they have the land ready, the workers ready and the materials ready to be able to actually delver the homes that they’ve sold,” said Ali Wolf, Zonda’s chief economist.
Hottest Housing Market in Years
Even with inflation, builders are benefiting from the hottest housing market in years. Demand for new homes has strengthened, while the number of previously occupied U.S. homes up for sale has fallen to historic lows, pushing prices higher.
The median price of a new home sold in July climbed 18.4% from a year earlier to $390,500, an all-time high, according to the Commerce Department. For existing homes, the median price jumped 17.8% in July to $359,900, according to the National Association of Realtors.
Builders typically hire contractors who handle framing, electrical, plumbing and other facets of construction. As these firms have faced higher costs to secure skilled labor or source the materials they need to do their job, they’ve had to pass those increases onto builders.
Tri Pointe Homes, which builds homes in 10 states, including California, Texas and Maryland, has faced higher labor costs. It’s been working through those increases, at times moving beyond its core group of contractors, said CEO Doug Bauer.
One way Tri Pointe and other builders are dealing with product delays is to ask contractors to install temporary fixtures and appliances, for example, so that buyers can move in as quickly as possible.
“Then, as soon as the original item becomes available, we are returning to install it,” Bauer said.
Most Homebuilders at the Mercy of Suppliers
To stay ahead of rising costs, Tri Pointe has raised its home prices and reduced buyer incentives when necessary. Even so, the builder has raised its guidance on the number of homes it expects to deliver this year from 6,000 to 6,300.
While the big, publicly traded builders have the means to buy building materials and warehouse them until needed, smaller builders that make up the majority of the industry are at the mercy of suppliers.
Sivage, whose company builds homes priced from $250,000 to $1 million, used to be able to lock in the price of lumber with suppliers a year in advance. That changed in recent years as demand for lumber increased. Now, Sivage doesn’t know what it will cost him until it’s ready for delivery.
“We’ve had to grin and bear it,” he said.