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Soaring Materials Costs Drive Home Prices Up

As the housing market gets leaner, potential buyers are turning in record numbers to new construction, but several factors are making those homes pricier than ever before.

First is a major shift in the market’s composition due to the record shortage of existing homes available. About 1 in 4 homes for sale are now newly built, the highest share ever. Historically new homes make up about 1 in 10, but fierce buyer competition is behind that shift. Prices for new and existing homes are at record highs.

But it is not just competition fueling prices for new homes. The cost of what goes into the home is adding to it as material and land prices surge.

Lumber prices seem to set a new record almost daily, now up 67% this year and up 340% from a year ago, according to Random Lengths, a wood products industry tracking firm. And lumber doesn’t just go into framing a house. Those added costs hit cabinets, doors, windows and flooring.

Lumber prices are skyrocketing for various reasons beyond just high demand from homebuilders and remodelers. Lumber tariffs had prices already rising a year ago, but then when the pandemic hit, production shut down. The expectation was that housing demand would dry up for a long time. But instead, after a brief pause, it came roaring back. Homebuilders were caught off guard, as were lumber producers.

“Clearly, increasing the cost of imports via tariffs does not help the situation,” said Robert Dietz, chief economist for the National Association of Home Builders. “We need to do everything that we can to increase domestic supply, including producing more domestic lumber, as well as resolving the trade dispute. It is matter of housing affordability.”

The surge in lumber prices in the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB.

Some builders have said they are slowing production in the face of exorbitant costs, but single-family housing starts were up 41% in March year over year, according to the U.S. Census. Builders are clearly trying to ramp up production as fast as they can to meet soaring demand.

“We just have no supply in either the new home or resale market today,” Sheryl Palmer, CEO of homebuilder Taylor Morrison, said in an interview on CNBC’s “Worldwide Exchange.”

Palmer said she has seen demand rise across all geographies and all segments of the market, particularly first-time buyers and 55+ buyers. Builder costs, however, are out of control, she said.

“We have seen, over the last four or five months, what I have never seen in my career before, is lumber to move to the level it has,” said Palmer. “We are very anxious to see full capacity back domestically. I think if we can get the full supply on, we can get lumber to level out a bit.”

But it’s not just lumber. Prices of gypsum, which is drywall, are up nearly 7% from a year ago.

Steel mill product prices are at a record high, up nearly 18% in March year over year. It’s used for beams, sheet metal products and wiring.

The price of copper also set a record high this month and is 27% year to date.

And then there is land. The price per single lot is up 11% this year compared last year, because demand is so high and supply is low. New lot supply is down 20% from a year ago, according to Zonda, a real estate data and advisory firm.

The inventory is tightest in San Diego, Baltimore and San Francisco. Nashville is also now seeing one of the biggest drops in supply. Lot supply in 90% of the top markets tracked by Zonda is considered significantly undersupplied.

“There’s a literal land grab going on as builders are scooping up lots to better match housing supply with demand,” said Ali Wolf, chief economist with Zonda. “The lot supply shortage is real, and it is causing prices to rise and builders to move further into the suburbs.”

Wolf adds that the new housing market is underperforming its full potential, and will continue to as long as the lot shortage persists. Add higher commodity prices to that equation and the new home market will continue to struggle at a time when it should be reaping huge rewards from hungry buyers.

Written by: Diana Olick for CNBC


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