March 31, 2021

Post-pandemic home sales look strong, but builders are struggling

The coronavirus crisis fueled incredible demand for single-family housing, and despite skyrocketing prices and rising mortgage interest rates, sales are positioned to remain strong.

Even with consumer optimism surging in 2021 over the potential end to the pandemic, what the housing market really needs is more houses. But the nation’s homebuilders are struggling.

Skilled labor shortages have been an issue for at least a decade for the home construction industry, but as the market fizzled away at the start of the pandemic, many builders made the choice to lay off more workers. As such, they were woefully unprepared when demand suddenly surged in early summer.

Another surprise: Materials costs skyrocketing. Already facing upward pressure from tariffs, lumber prices tripled since April 2020, driven by new demand and delivery delays. With other material costs rising as well, the total price of a new home of building a new home went up an average of $26,000.

Builders operate on razor thin profit margins, and must pass that cost on to customers, at a time when prices are already rising. Prices are now up over 10% from this time in 2020, according to CoreLogic, and there appears to be no letup.

Some builders, including several of the nation’s largest, are slowing production, hoping prices will ease soon. The number of single-family homes permitted - but not started - jumped 9.6% in December, exacerbating the shortage.

Builders are hopeful a new trade deal with Canada might ease lumber costs, but strict zoning laws still make it costly and challenging in some of the places where housing is needed most.

Single-family housing starts came in much lower than expected in February, and the backlog of unbuilt homes is rising. Add in the recent jump in mortgage interest rates, and builders are quickly losing confidence.

Robert Dietz, the chief economist for the National Association of Home Builders (NAHB) said its Housing Market Index dipped two points from its February level. At 82 it is down 8 points from the all-time high it established last November.

Even with households consolidating, experts estimate a deficit of 900,000 homes in the U.S. just to get back to normal in terms of single-family homes.