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Up is Down in the New Home Market

By Brian Kline | November 13, 2020

What’s going on with first time buyers, the over age 55 market, COVID-19, a presidential election, the cost of lumber, and more? Every industry prefers predictability over unpredictability and the home building market is no different. Yet, everything going on is about instability. What does all of this mean to the cost of new housing?

The Cost of 2X4 Lumber

Almost every variable indicates that the price of new housing will continue to increase as will the shortage of new home inventory. The cost of 2X4 lumber is up dramatically and isn’t likely to go down significantly. According to the National Association of Home Builders, the price of lumber has gone through the roof since April to the tune of 160%. That averages out to about a $16,000 cost increase to build a new house. The primary reason is not enough domestic production since President Trump imposed a 20% tariff on Canadian soft lumber back in 2017. Alone, that 20% does not account for the 160% cost increase this year but high demand for new homes along with many other factors has.

Under a Biden administration, you can reasonably expect Canadian tariffs to be removed but there will be other consequences. We have to wait and see what new environmental policies are rolled out but more restrictions on domestic lumber harvesting can be expected. There can be little doubt that Biden will want to deal with the cost of housing but that is likely to be in the form of subsidies and federal expenditures rather than building more homes.

You can also expect Biden to continue regulating the housing market in contrast to Trump’s efforts to deregulate the market. Builders have long claimed that regulatory compliance and permitting costs are a significant cause of price hikes. The bottom line is that the cost of new homes is not likely to decrease anytime soon despite builder confidence in the market reached all-time highs in September and October. There is plenty of buyer demand but limited resources.

First Homes or Last Homes

The National Association of Home Builders is also reporting all-time high confidence in the 55+ Housing Market during the third quarter of 2020. This was a bit unexpected because it represents the population most significantly at risk for COVID-19 as well as a generation less likely to be buying new homes. The all-time high confidence includes both the 55+ market for single-family homes and multifamily condominiums.

In an industry also experiencing labor shortages causing increasing labor costs, it can only mean more competition between the markets for first homes and last homes. Of course, the 55+ market is also constrained by the same shortages of key building materials, which further contributes to affordability concerns and delayed construction schedules for both markets.

The bottom line is that the level of new housing construction is not going to be increasing significantly in the foreseeable future even in the face of very strong demand. The macro factors strongly indicate that both millennials and seniors can only expect fewer choices and higher prices.

Please comment with your perceptions, thoughts, and insights.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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