Why price volatility is driving home-building

Why price volatility is driving home-building

Today, the price of a key building material is more unpredictable than ever since the end of World War II. According to a recent analysis from the National Association of Home Builders, the cost of building materials went up by 1.5% in December, according to the Bureau of Labor Statistics. The increasing cost of lumber was a factor in the overall increase.

The price of softwood lumber has gone up nearly 45% since September, according to the data from the federal government. The price mills are charging for lumber used in frame homes has tripled since August, according to other data.

Volatility is another problem, and rising prices are one of the problems. Over the course of the epidemic, lumber prices have fluctuated dramatically. Between 1947 and 2019 the monthly change in softwood lumber averaged 0.3%. Since January 2020, it has averaged 12%.

The highest average monthly change over a two-year period since this data began in 1947 is now being collected in 1947, but it is nearly three times the previous record, according to the report.

The housing market is currently struggling due to the record low inventory of homes for sale due to the volatility of the market.

Robert Dietz, chief economist at the National Association of Home Builders, said when you introduce the cost volatility in major products like lumber, it makes it harder for builders to expand their level of home construction, which reduces the available inventory in the market. The cost volatility that you see in the construction space is responsible for some of the price gains in the overall housing market. It is hard to undersell the importance of lumber to home builders. 90 percent of the single-family homes built in this country are wood-framed, Dietz said. Comparatively, only 9% are steel-framed, while the rest are concrete-framed.

As goes the lumber industry, so does pacing and pricing of single-family home-building, Dietz said.

The volatility in lumber prices has contributed to the higher cost of newly built homes, in the most direct sense. The median price on these homes was up 19% year-over-year as of November, the most recent month for which data is available.

Odeta Kushi, deputy chief economist at First American Financial Corp., said that higher costs for lumber and other building materials are often passed on to the buyer in the form of higher new-home prices. The challenge for builders is how they deal with higher material costs while keeping new house prices within reach of buyers, especially in a rising-rate environment. Dietz said that material pricing has the most adverse impact on entry-level housing because these buyers are more price-sensitive.

The volatility could cause builders to build higher-end homes, since the additional costs are more easily absorbed.

The use of lumber isn't limited to building single-family homes. It is also used to remodel existing homes and frame individual apartments in multifamily buildings. It will have a ripple effect on the rental market, as long as those activities are slower or more expensive because of the availability and pricing of wood.

It is hard to come by affordable options, whether you are a home buyer or a renter. According to Realtor.com, the nation is short some 5.2 million housing units, which is a reflection of how undersupplied the housing market is.

Danielle Hale, chief economist at Realtor.com, said there was a housing shortage because of the fact that more new households than new homes have been seen over the last decade, and that shortage has stressed the housing market in the absence of supply-chain challenges and input-price volatility.

Because of the importance of home-building in that context, anything that gets in the way of building will have an outsized impact on households across the country.

Consumers in the market for a new home should be prepared to wait, and with price volatility and other challenges contributing to delays, the wait is likely to be longer than usual, Hale said.