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Why US home prices are still so high

A real estate sign advertising a new home for sale in Vienna, Virginia
Reuters/Larry Downing
Hot commodity.
  • Nate DiCamillo
By Nate DiCamillo

Economics reporter based in New York.

Published Last updated

Lumber may be cheaper, but home builders are now struggling with rising prices and longer shipping times for everything else—including the kitchen sink.

Builders complain they can’t find enough supplies of basic items, from refrigerators to garage door parts, and when they do, it’s often at a huge markup. “Early on it was lumber and those prices have come down, but now it’s a broader supply chain challenge,” said Robert Dietz, chief economist at the National Association of Home Builders (NAHB). “Costs are up 20% year-over-year, or materials that would take weeks to arrive are now taking months.”

It’s yet another way in which supply chain issues are reverberating across the economy. In addition to the supply disruptions by the pandemic itself, like factory closures and understaffed ports, now producers are also contending with a rush in demand.

So even though existing home sales jumped 7% in September compared with the previous month, housing starts fell by 1.6% in the same period.

The mismatch between supply and demand has been driving increases in home prices. In August, the latest month in which data were available, the main US housing price index continued to surge at a near record pace of 19.8% from the same period last year.

The home market will likely remain tight until 2022

Supply chain disruptions are delaying home construction even before it starts, with a growing backlog of building projects that have permits but haven’t broken ground. Though this backlog seems to have peaked in June 2021, it doesn’t look like supply chain problems will cool off until well into 2022, Dietz said.

Tight inventories could spell more home price pops in the future, said Nancy Vanden Houten, lead US economist at Oxford Economics. But rapidly climbing prices may eventually put off home buyers, or make it more difficult for them to get loans.

“Something’s got to give,” Vanden Houten said.

US homebuilders are upbeat

Despite supply chain headaches, home builders were feeling more confident in October month vs. the previous month, according to the NAHB/Wells Fargo Housing Market Index (HMI), a gauge for how  many homes they expect to sell

Their optimism has partly to do with the lower lumber prices. At a record high of $1,550 per thousand board feet during the summer, they were a major hurdle for homebuilders, but they have since gone down to $550 per thousand board feet. So even with higher prices for sinks and other key items, builders expect single family housing starts to go up by 10% for the full year. (That’s lower than a 11.6% jump in 2020, but higher than 1.4% in 2019.)

That is, unless another pandemic-induced disruption crops up. One worry for homebuilders is the level of interest rates, which the Fed might push higher sooner than expected given price increases across the economy.

“With higher prices and higher interest rates, I think we’re going to see declines in housing affordability and that is going to price some buyers out of the market,” Dietz said.

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