New home builders continue to be faced with a demand for more production of new homes across the country. Additional new home inventory would be a blessing to buyers in search of their dream home and in the process take some of the pressure off the the preexisting home market. Both actions would then result in home affordability for more home buyers who are being forced out of the market currently.
Last week CoreLogic’s Chief Economist Frank Nothaft spoke at the National Association of Real Estate Editors 51st Annual Conference. His presentation was focused on the 4 ‘L’s of New Home Construction: Lots, Labor, Lumber, and Lending. His concern was that all 4 areas are suffering from a supply problem, which then leads to additional and higher costs.
Lots – The availability and costs of land are not in favor of the builders in and near the major metropolitan areas. Yes there is the option of building farther out from the cities where land is more affordable, but that option is not as attractive and desirable to home buyers who want to be close to work.
Labor – The number of skilled construction and trade workers is a huge concern and will continue to be. During the last housing crash, many skilled workers found other employment as well as many returned to Mexico and still have not returned. The work force has also begun to age and many have retired. Those workers that are here are being able to demand and receive top dollar for their services. I spoke with one new home builder that shared with me that the North Texas market is 2,000 licensed electricians short of meeting the current demand.
Lumber – The cost of building a new home is determined by the cost of the land and the cost of the labor and just as importantly the cost of the supplies needed. Evidently lumber costs continue to rise due to policies restricting the importation of Canadian lumber. Builders are opting for building larger luxury homes as a way to recover their building costs as compared to building less profitable smaller single-family homes. Year-over-year, lumber costs are up 13% after reaching a high of $433 per 1,000 board feet in April.
Lending – With all of the fall-out and shake-up in the banking industry during the Great Recession, there was a huge closing and loss of many small community banks. These banks were a great lending source for builders in their community as the banks were willing to invest back into their community to help it grow and thrive. Then consider all of the new federal banking guidelines that make borrowing funds more expensive and difficult more builders.
The bottom line is that with the current situation as it is, builders are more inclined to put their emphasis and resources on the more attractive to them luxury properties that provide them a higher margin due to the higher sales price. Starter and trade up homes will be less attractive to builders as they will be absorbing the additional costs and therefore facing a much higher business risk.
Source: CoreLogic, SimplifyingTheMarket.com
Steve Lester, REALTOR® is with Keller Williams Realty living in Allen, Texas.