Home builders

Inflation forces some homebuilders to slow down and raise prices

Associated press

September 22, 2021 12:00

LOS ANGELES (AP) — Even in the hottest U.S. real estate market in more than a decade, building new homes has become a frustrating, uncertain and expensive proposition for many homebuilders.

Rising costs and shortages of building materials and labor are impacting the home construction industry, which accounted for nearly 12% of all U.S. home sales in July. Construction delays are common, prompting many builders to put the brakes on the number of new homes they put up for sale. As building a new home becomes more expensive, some of those costs are passed on to buyers.

Across the economy, prices have soared this year amid shortages of manufactured goods and components, from cars and computer chips to paint and building materials. The Federal Reserve is meeting this week and officials’ outlook on when they might start raising interest rates could indicate how concerned the Fed is about inflation.

The constraints on homebuilders are bad news for homebuyers, who are already facing historically low levels of resale homes on the market and record prices. Economists fear that many first-time buyers will be shut out of the market. The erosion of affordability is one of the reasons the pace of home sales has slowed in recent months.

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At Sivage Homes in Albuquerque, NM, the builder’s efforts to keep its construction on schedule is compromised almost daily by delays for everything from plumbing fixtures and windows to tubs and appliances.

“These days, we could literally be waiting 30 days, maybe even 60, for one thing or another,” said Mike Sivage, CEO. “I’ve been doing this since 1986. and I have to say I’ve never seen anything like it before.”

The pandemic has paved the way for higher prices and shortages of building products. Factories have been temporarily idle and are now trying to catch up on production even as demand has intensified due to a surprisingly warm housing market and a surge in home renovations.

Lumber futures hit an all-time high of $1,670 per thousand board feet in May. They have since fallen to $634, about 10% higher than a year ago. Still, wholesale prices for a category of home building components including windows, tiles, doors and steel have risen 22% in the past 12 months, according to an analysis of data from the Department of work conducted by the National Association of Home Builders. Prior to 2020, it was common for these aggregate prices to increase by just over 1% per year.

Many builders, including Thomas James Homes, which operates in California, Washington and Colorado, have yet to cut corners on lumber.

“The price we’re paying for wood today is the same as we were paying 90 or 120 days ago,” said Jon Tattersall, president of the builder, who noted that his company’s overall construction costs had risen about 30% since November.

Homebuyers also shouldn’t expect to see discounts due to lower lumber prices, as builders set their prices largely based on overall demand in the housing market. A contract signed for a home that’s not yet built usually includes an allowance for unexpected construction costs, but builders usually have to absorb big increases and then pass them on to the next buyer.
“On our futures, these are the ones we need to increase costs on,” Tattersall said.

Rising prices for building materials 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 felt throughout the economy. Consumer prices rose 5.3% in August from the same month a year ago. At the producer level, inflation jumped to more than 8.3%, the biggest annual gain ever recorded.

The Federal Reserve said it believed the spike in inflation would be temporary. For now, however, rising building material costs and continued supply shortages are making everything from homes 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 that around 85% of builders intentionally limit their sales.

Even with inflation, builders are enjoying the hottest housing market in years. Demand for new homes has strengthened, while the number of existing homes for sale in the United States has fallen to historic lows, pushing prices higher.

The median price of a new home sold in July jumped 18.4% from a year earlier to a record high of $390,500, 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.

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