Could the soaring price of lumber hammer a burgeoning rebound in homebuilding?
Housing appears to be an economic leader amid a pandemic that’s hurt many other industries. Local builders have seen sales rebound as house hunters, armed with low mortgage rates, seek bigger living spaces. As a result, developers are slowing restarting construction plans tempered by “stay at home” mandates and overall economic fears.
But now the price of lumber, a key construction material, has tripled off mid-lockdown lows.
Between April 1 and Aug. 27, commodity traders bid up lumber to $850 per 1,000 board feet from $260, according to Macrotrends, which tracks the commodity market’s benchmark prices for homebuilding. That’s a 227% jump to a record high following the pandemic’s bottom off of a four-year low.
It’s been a wild year for real estate. When the pandemic first hit and lockdowns became the norm, construction ground to a near halt. Lumber mills were idled.
Fears of a housing meltdown were soothed by historically low mortgage rates and loan forbearance programs for cash-poor homeowners. With more people working from home — not to mention home-schooling their children — new housing and remodeling efforts became priorities.
The rush for wood was amplified by unexpected projects such as building outdoor seating for restaurants that were banned from serving indoors. All of a sudden, “lumber shortage” was the talk.
It’s a significant cost. The National Association of Home Builders estimates lumber’s spike would add roughly $16,000 in costs to a typical newly built home of just under 2,500 square feet in size.
That’s a noteworthy boost for the popular and more affordable housing markets, such as those in the Inland Empire.
“Housing has been a bright spot for the U.S. economy, with low-interest rates and a desire for more space boosting demand for new homes, particularly in affordable, lower density markets,” says Robert Dietz, the trade group’s chief economist. “However, that bright spot could flicker as buyers are priced out of the market due to escalating lumber and other material costs.”
Builders can choose to take less profit or let home prices rise and lower “affordability” for some house hunters. But if there’s no lumber, there’s nothing to sell.
“Availability is key for the economics — that is the real world of nuts, bolts, and lumber,” economist Dietz says. “Pricing is the signal that says availability is strained. Supply chains are disrupted, which means there are limits to how much home construction can occur in 2020 despite improving demand.”
Hot property
In Southern California, builders are enjoying a continued rebound from the lockdown bottom in spring.
DQNews stats show 1,635 completed sales of newly constructed residences in July — that’s up 33% from April when the economy was suffering its initial coronavirus shock.
Builders too have been on their own wild ride in 2020. New home sales in the six-county region sales were 5.5% lower than in July 2019, but that’s mostly because house hunters swiftly gobbled up all the standing inventory. As a result, builders accounted for 7.2% of the region’s home purchases in July, down from a year-ago share of 7.8%.
Let’s note that in the last 12 months, 20,081 new homes were sold in the region — 2.1% above vs. the previous year.
In the sales upswing, builders also got modest price increases. July’s median selling price of $565,000 was up 2.5% in a year.
The new home sales upswing should continue. Meyers LLC estimates builders in Los Angeles and Orange counties saw 20% more contracts signed in August vs. July — a pace that’s up 24% in a year. In Riverside and San Bernardino counties, sales are up 4.9% for the month and 63% in a year.
Don’t forget that “pending sales” require several months to get to closing and not all of these deals will be completed.
“Consumers in SoCal are looking for one of two things today: a reasonably-priced home or more space,” says Meyers analyst Ali Wolf. “That combination is hard to find in Orange County so many locals have turned inland.
Wolf notes that slightly bigger and more affordable homes have been the staple of the Inland Empire this cycle but with one big tradeoff — the commute. “COVID-19 has changed our relationship with the office and builders in the Inland Empire have been a clear beneficiary from the new work-from-home culture,” she says.
Building more
Local homebuilders may have doubled their construction plans since May’s coronavirus bottom, but permitting data suggests they’re still a bit skeptical of the rebound’s durability.
Census Bureau construction data shows 4,019 residential units were permitted in the four-county region in July, 107% above May’s stay-at-home-orders depressed low. This data includes single-family homes and multi-family housing.
However, the summer’s permit surge still left construction plans in the region 15% below July 2019’s level. In the past 12 months, 42,946 SoCal units were planned — 2% below the previous five-year average.
The rest of the state saw 6,331 units permitted in July — 33% above May and 21% above July 2019. Still, no building boom. In the past 12 months, 62,413 units were planned — 2% above the previous five-year average.
Source: Orange County Register
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