For prospective home buyers, especially those who are trying to purchase their very first home, and for those over 55, buying a new home in 2021 is a difficult proposition. From bark-eating beetles to millennials coming of age to the ramifications of the pandemic, there are many elements working together to raise the prices of new construction.
The Current Situation
Home buyers are seeing outlandish numbers whether they are trying to buy a home or build one. There are several reasons for this hot housing market, and the market is definitely to the seller’s advantage.
First, the number of houses on the market has shifted dramatically, because the number of existing homes is so sparse. CNBC reports “About 1 in 4 homes for sale are now newly built, the highest share ever.” In a normal situation, about 1 in 10 houses that are sold are newly built. With so many new homes being built, the price of lumber is more important than ever.
The second reason for high prices is the cost of lumber. Fortune reported last week that, “The price per thousand board feet of lumber soared to an all-time high of $1,188, according to Random Lengths. Since the onset of the pandemic, lumber has shot up a whopping 232%.”
With these astronomical increases, new homes are an average of over $35,000 more expensive than they were last year, and this is putting a damper in the home-buying plans of many.
The Perfect Storm
The high cost of lumber links directly to a shortage of wood, which essentially was caused by a perfect storm, both from the vantage of supply and demand. As the pandemic began, sawmills planned for a long recession, and deliberately slowed production. However, people were stuck at home and finally had time to build that deck they always talked about or needed to build an extra room for an office because people were now crowded together working at home. Millennials are also making a substantial impact on the housing economy, just as they stretched the public school system in the 1990s. With these events occurring simultaneously, the United States Housing market is truly experiencing a perfect storm.
A chain reaction of climate change and nature have wreaked havoc on the logging industry. The drought makes trees more susceptible to the attacks from bark-eating beetles, but loggers had been successfully working around the beetles, even successfully harvesting and using wood that had been dead for a while. But beginning in 2017, wildfires ravaged British Columbia, America’s prime lumber land, and burned the last salvageable tree area. Ironically, the trees had secreted more pitch to fight off the beetles, and the pitch made them extremely flammable.
“There are people who say, ‘Climate change isn’t affecting me,’” Janice Cooke, a forest-industry veteran and biology professor at the University of Alberta, said. “But they’re going to go to the hardware store and say, ‘Holy cow, the price of lumber has gone up.’”
Whose Bubble Will Burst?
According to experts, the red-hot housing industry is not going away anytime soon. And unlike the bubble from 2006 that burst, underwriters and buyers are playing the game more carefully this time around and the situation is more stable.
Federal Reserve Chairman Jerome Powell “I don’t see the kind of financial-stability concerns that really do reside around the housing sector. I don’t see bad loans and unsustainable prices and that kind of thing.”
As for the lumber itself, there is a small light at the end of the tunnel. Reuters reported, “The lumber industry is going to hit production capacity this summer, but things will calm down in 2022.” As soon as production can even out, the price of lumber should drop. The next few months could be tricky, however.
“While lumber prices should come back to earth, headwinds remain. Resources remain constrained and Washington has to conduct trade negotiations with Canada, which provides the United States with about 30% of its lumber,” according to Dustin Jalbert, senior economist and lumber industry specialist at Fastmarkets in Burlington, Massachusetts.
The pandemic has rocked the housing market along with anything else, in ways that were never expected. With so many buyers and so few sellers, along with the high cost of new real estate, the market is very tricky for new buyers looking for homes.
I like to spend my time giving back with organizations that focus on mentoring aspiring entrepreneurs. I have supported after school programs that focus on entrepreneurial and global initiatives in local primary schools. I recently extended my mentoring to include students at Case Western Reserve University.