Will construction costs continue to hold back supply?

Are the costs of new construction in sight?

It has been well documented that the costs of supplies for new construction have risen steadily since the pandemic – a simple function of supply and demand affecting the cost of steel, concrete and, most importantly, fuel. lumber. These rising costs have forced several builders to shut down or dramatically reduce the number of homes they produce for fear of absorbing these increases and eroding their profit margins.

The reason for this imbalance between supply and demand, especially for timber, is a congruence of factors. Many sawmills were forced to close their factories at the start of the pandemic. Additionally, as factories began to open, the industry underestimated the intense demand resulting from both home improvement projects spurred by being ‘locked’ inside for months, as well as the resurgence of demand for new homes for people looking to relocate or modernize by mail. -pandemic economy. This imbalance between supply and demand led lumber prices to peak at over $ 1,600 per thousand board feet in early May (for reference, the price was below $ 400 per thousand board feet). – board a year ago). As lumber suppliers have woken up to increased demand, they have been slow to respond with increased production due to severe labor shortages caused by the pandemic.

There appears to be a light at the end of the tunnel, however. As more and more workers return to sawmills and sawmills begin to operate at full capacity, lumber production gradually accelerates. In addition, some of the demand for stimulus-induced remodeling projects slowed, bringing the supply and demand curve closer to a semblance of normal. The hiatus previously mentioned by many home builders is also slowing demand for lumber. The result was a dramatic drop in the lumber futures market, which fell over 45% (closing just below 900 on June 18). While lumber is the most dramatic example of this increase in supply, most other materials and components in new construction follow a similar trend.

Does this mean new home prices are going to collapse and buyers should wait? Not so fast. What this hopefully means is that builders can resume a more ‘normal’ pace of construction to start closing the huge gap in new housing units needed to keep up with the current level of demand – according to according to some estimates, the country lacks more than 3 million households to meet demand. The additional supply of new housing is needed to supplement the anemic stock of existing housing in order to simply meet the current level of demand.

What is significant in the rapid decline of the lumber futures market is the possibility that the inflationary pressures we have experienced recently (the consumer price index has risen by 5% – the fastest pace). faster in 13 years) are only temporary because of these wild fluctuations in the costs of materials caused by the pandemic. This appears to be the basis of the Federal Reserve’s stance to keep interest rates low – citing them as temporary rather than permanent inflationary pressures.

The coming months will be revealing in determining whether these price fluctuations were indeed due to supply problems caused by the pandemic. If this is the case, we can expect the cost of new construction to stabilize and confidence in the building industry to resume a normal level of housing construction. A more subdued inflationary environment should also lead to a more sustained economic recovery, which is good news as our new normal approaches.

Peter Crowley is the President of Re / Max Alliance Group.

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