As opposed to the rest of the U.S. economy, the housing market is enjoying a classic V-shaped recovery.
That doesn’t mean there aren’t threats on the horizon. And as the supply of available homes dries up, those threats are rapidly lurching into focus.
At the outset of the pandemic, homebuilding understandably screeched to a halt. Construction activity has picked up sharply in recent months.
After falling a record 30.2% in April, privately-owned housing starts increased by 17.3% in June over May.
Unwavering home buying demand – driven by record-low mortgage rates – and a tight supply of existing homes for sale should support housing construction in the near term.
Just look at new home sales, which exploded to a nearly 13-year high in June.
Purchases of new single-family homes climbed 13.8% from May to an annualized pace of 776,000. The median forecast from a Bloomberg survey of economists predicted a selling rate of 700,000.
The median selling price rose 5.6% from the previous year to $329,200 as inventory shrank.
So what’s the problem?
Lumber has become much harder to find amid the surge in homebuilding activity.
Because inventory is low and demand for housing is high, lumber prices have risen by around 60% over the past six months, offsetting the loss at the start of the year.
The price of softwood lumber soared 19% year over year and 11% from May to June.
In addition to the pandemic-related supply chain constraints, tariffs on lumber from Canadian mills continue to drive up prices for U.S. construction companies.
These costs will likely keep rising as the pandemic continues its course in the United States and worldwide.
Spiking prices in building materials are a downside risk to the entire sector. Higher lumber costs mean higher new home prices, making housing construction less affordable.
Framing lumber makes up roughly a fifth of the materials cost of building a home. When we see a price increase this large over such a short period, it’s going to have negative effects on affordability for prospective home buyers.
That’s a serious problem for the U.S. housing market. The sector faced an inventory shortage before the pandemic. It’s only gotten worse since.
The problem for builders is that most of the housing demand is in the entry-level and mid-range segments of the market.
Building cheap homes means tighter margins, even under normal conditions.
Rising lumber prices threaten these margins and make building affordable homes even less financially viable.
Last modified: July 25, 2020 5:20 PM UTC