The cost to build new homes in the US rose 15% in 2021

Lumber became a hot commodity in 2021.
Lumber became a hot commodity in 2021.
Image: November 29, 2020. REUTERS/Alisha Jucevic
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New homes, like many other goods, have gotten much more expensive for developers to build. Material costs for residential construction rose 15% in 2021 over the previous year, according to the Bureau of Labor Statistics’ Producer price indexes (pdf).

That’s a dramatic increase from the previous annual growth rate of 1% to 7%, and driving up home prices across the US. The median price (pdf) for a new single-family home in the US crossed the threshold of $400,000 for the first time in July of 2021 and has continued rising. It hit $417,000 in Nov. 2021, up nearly 20% over a year earlier.

For home builders, the primary issue is the price of lumber. As demand increased while wildfires and wood-boring beetles choked off supply, prices soared to a record high of about $1,700 per thousand board-feet in May 2021, dropped down to around $500 a few months later, and then spiked back up to $1,200 this year. By contrast, lumber prices have rarely exceeded $600 per thousand board-feet for the last decade.

And it’s not just lumber.  The price of glass, steel, insulation, and plastic products all saw big price hikes this past year. The rising costs have come alongside delivery delays that have added another layer of chaos to the home building industry.

It’s the supply chain

Disruptions from the pandemic that set off delays and price increases show little signs of abating nearly two years later. The construction industry was particularly hard hit by delays, while the skilled construction labor force hasn’t returned to pre-pandemic levels. A report from the Home Builders Institute projected that the industry needs some 2.2 million workers to keep up with current demand.

The booming demand for construction material and labor has come from people seeking new housing during the pandemic, but also other pandemic-driven needs like outdoor dining shelters for restaurant and renovations or add-ons to existing homes. (Studio Shed, a company that sells custom backyard structures told the New York Times that it saw a 500% increase in sales from May 2019 to May 2020.)

“There was a sudden surge in demand following cancellations of orders and cutbacks,” explained Ken Simonson, chief economist at the Associated General Contractors of America. “Producers were really behind the curve; it overwhelmed some producers and transportation facilities. “

It’s a textbook example of the bullwhip effect—an economic term for the way even small shifts in demand for certain goods have outsized effects further up the supply chain.  The ability to restore balance in the market ultimately lies with the suppliers of these materials—steel mills,  plastics producers, and especially lumber producers. But if they continue to struggle to increase production—as lumber producers are, thanks in part to climate change—prices will stay high.

It’s a material world (driving up home prices)

Ali Wolf, the chief economist at Zonda, a housing market research firm, says there’s a direct correlation between the cost of goods and the price of homes. As homes have become more expensive for developers to build, they have passed along higher cost of materials to home buyers. “Towards the third quarter of 2021, some of the cost pressures started to come down for builders,” says Wolf, “and they almost immediately lowered the rate at which they raised prices. Home prices still went up, but more slowly.”

Builders also continue to deal with delays, shortages, and a lack of labor: 93% of firms surveyed by Zonda in January 2022 said they were experiencing significant supply disruptions. To cope, builders have slowed down sales.  DR Horton, the largest residential builder in the US, has delayed home sales until later in construction, adding more pressure on home prices as a near-record number of Americans enter the market.

Wolf says she doesn’t expect these supply issues to ease anytime soon: “A lot of suppliers are running into labor and material challenges themselves, and builders are still demanding a lot of product.” Any reduction in the price of new homes is more likely to come from the demand side; If interest rates go up make mortgages more expensive for buyers, they may become less tolerant of high home prices and slow down the buying spree.