Over the summer there has been a massive correction in the lumber and sheathing commodity markets, and although these markets are somewhat higher than last year, most experts agree the pricing is closer to a true market level. From June 1st to September 1st, 7/16” OSB sheathings dropped 65 percent and 2x4 spruce studs have dropped a whopping 72 percent. You would think with these types of drops that home pricing would plunge, but don’t expect that to happen.
Here are 5 reasons why you will not see home pricing drop anytime soon:
First, current housing inventories in many areas are less than a month, and there is an overwhelming demand for homes. As people who have been pent up for more than a year flee the big urban areas, and as the population continues to grow, coupled with a decade of under building in America, the country has been left with a huge housing inventory deficit. Housing demand and the lack of inventory will keep pricing high and continue to move prices higher.
Understand, unlike the mid-2000s housing bubble which was driven by cheap money that was accessible to everyone, this is a housing boom in which people are looking for a place to lay their heads. This is very similar to the housing boom that swept America for more than two decades after the soldiers returned from World War II.
The next big factors keeping prices high are land costs and development. Over the last decade, the housing market had cheap, developed dirt due to of the crash of 2008. Millions of acres of land that were foreclosed and sold for pennies on the dollar were bought by huge builders who have been working off low-cost dirt pricing. The cost of land pricing has been escalating, but worse is the cost of development. These costs are pushing developed lot prices up 2 and 3 times from just a couple of years ago. Furthermore, it is hard to find developed lots. The last good supply of foreclosed, cheap land is gone, and now, homebuyers will be paying for much higher priced land.
The third reason for high prices in housing is that the days of cheap labor are over. The anti-immigration policy of America along with rising inflation is forcing construction companies to pay a lot more for labor, especially during this labor shortage. Additionally, as skilled tradesmen age out of the construction industry, along with a collapse of trade schools over the last decade, there has been a decimation of the construction industry that has created a nightmare scenario for builders. No one expects labor costs to drop, and in fact, you can expect to pay more.
From a supplier’s viewpoint, the fourth reason housing prices remain high is obvious; nothing else in the construction supply chain is dropping in price. Also, the anti-trade policies of the country over the last five years have created huge price increases in most products used in home construction. Steel pricing is soaring, and anything bought overseas costs a lot more due to tariffs. America is in competition with the rest of the world for basic materials, and we are seeing the first glimpses in the construction industry of what a true Made in America scenario looks like - higher pricing, less variety, and much longer lead times.
Finally, the lack of competition due to labor and government regulations is stymieing lower costs in construction because new competitors are unable to start a business. Currently if a businessperson wanted to open a new truss plant, there are obstacles they would face such as difficulties in obtaining equipment and metal plates to build the trusses, finding a building, and employing people to build them. In the past, construction demand like we are currently experiencing would create a plethora of new businesses, but today, you simply can’t find the resources. Therefore, bigger companies are working hard to acquire smaller entities that are fully operational.
Many people wanting to buy a home in the summer may have been holding off expecting lower pricing, only to find prices are much higher in the winter. Don’t forget that the home selling season in Florida is the winter.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc., and he is also the host of the “Around the House” Show which can be seen at AroundtheHouse.TV.