Magazine Biz

July Industry Observations – Builder and Developer

Abby_Pittman.jpgThe Sustainability of Supply and Demand in the Housing Industry

Housing costs continue to increase because of the rising land, lumber, and labor costs associated with building

By ABBY PITTMAN

Welcome to our July issue of Builder and Developer magazine. If you are a frequent reader of our lovely magazines, you will know that in the June issue of Builder and Developer, my Industry Observations column delved into the affordable housing crisis in California.

In this issue, I want to take a macro look behind why housing affordability is such an issue. This crisis is not just limited to California – homebuyers and homebuilders throughout the country are feeling the financial pressure of production. One of the reasons for this is because the process of building is so expensive.

The first thing you do when you’re planning on building a house is look at lots of lots. However, land is scarce – and therefore more expensive. This new heightened focus on land development materialized because of the shortage of finished lots – impairing the housing market recovery. Our June issue of Builder and Developer was our land issue, and was chock-full of industry professionals clueing us in on why land is currently such an issue: “Land developers will no longer make the type of deals that caused so much financial hardship after the financial crisis,” Manuel Lazerov, President of InfrastructureFinancial. org explained. “Today, a builder will have to put so much down on a piece of land being developed for them that, should they ever default, it would have a real financial impact and, at the same time, insulate the land developer from financial exposure.” Not a winning statement if you’re a builder trying to build a home – but nevertheless true. Developed lot shortages, and the added complicated permitting costs that go with it, do not help builders build affordable housing.

Once you’ve purchased your smaller-than-you-wanted, overly priced lot, you can begin the actual production of building the house (you know, after you go through the lengthy process of getting all of your permits and everything in order.) The record-high cost of lumber is hurting builders’ bottom line, and making it harder for builders to offer competitive prices for newcomers to the home-buying game.

Over a year ago, the Trump administration imposed anti-subsidy duties on imports of Canadian softwood lumber. Thankfully, we are not run by a dictatorship and Congress has finally come together across party lines to address this issue:

“More than 170 lawmakers sent a letter on Tuesday to the Trump administration that calls on the U.S. to resume talks with Canada to negotiate a new softwood lumber trade agreement,” NAHB Chairman Randy Noel stated in a press release on the NAHB website. “NAHB applauds these members of Congress from both sides of the political aisle for taking a stand for homeownership. The current situation is clearly unacceptable. Tariffs averaging more than 20 percent on Canadian softwood lumber shipments into the U.S. are contributing to rising market volatility and record-high lumber prices that are making it harder for millions of Americans to afford a home.”

Not only are building materials expensive because of added tariffs and trade wars – labor shortage is another large contender. A shortage of construction workers and an increase in tight zoning regulations have led to higher construction and housing costs. So now, land, lumber, and labor have all drastically increased in price and contribute to the lack of affordable housing.

To top it all off – the housing shortage. Yes, people are buying houses. But sales at upper price points have slowed in multiple markets due to the higher supply levels and weakening affordability. The shortage of for-sale homes translates to higher prices – good for current homeowners that are currently generating home-equity wealth, bad for the housing economy and first-time buyers because it chips away at affordability and makes it challenging for prospective homeowners to buy. I only took two economics classes, but I am positive that this supply and demand imbalance can only go on for so long.

In fact, just this past weekend someone was telling me how her and her husband got into six different bidding wars attempting to purchase a house – some that they didn’t even like that much, and finally gave up because they were bidding over budget on a house that wasn’t even their dream house. Now, this couple is waiting for the market to even out again.

Affordability is rapidly hitting its breaking point for consumers. Yes, houses are selling, but because of the increasing land, lumber, and labor costs that are currently trending, prices are being driven up. Buyers will soon stop buying, especially if prices continue to increase. The question now becomes not if the market will break, but when.

Abby Pittman is the Editor for Builder and Developer magazine. She may be reached at abby@penpubinc.com

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