Bad News for New Home Construction Market
January 2013 – A recent article from the LA Times is painting a bad picture for builders this year. The cost of essential building materials are rising significantly and blowing past the cost of inflation. Combine this with the low appraisals that lenders are handing out and we’ve got a very bad sign for the immediate future of building.
According to the National Association of Builders, the price for lumber is up 35% over a year ago. That’s huge when you consider inflation is only about 2% for the same time period. Similar price increases have been seen for drywall and cement products. Drywall suppliers are giving vendors notices to anticipate a 30% increase this year.
According to the article, rising prices are mostly the result of supply problems (many manufacturing plants have been shut down due to slow demand) and demand from home buyers taking advantage of low interest rates. Both of these issues are not likely to change in the coming year.
Local Markets Feeling Same Pressure
Here in New England we’re feeling the same market pressures. Materials are at all time highs and there doesn’t seem to be an end in sight. In the photo above you can see my dad and I framing my new home. The home was built almost 7 years ago. The engineered floor joist in my dad’s hand now costs about 75% more today than it did then. Combine that with the fact that the actual house now appraises about 20% to 25% less than it did when it was built. Just think about that math…..materials MUCH higher and appraisals down significantly.
What Does This All Mean?
If you’re a builder all I can say is hold on, keep doing renovation work and one day…..one day things will come back but don’t count on it anytime soon. If you’re a home owner and you want to build a new home, well be prepared to pay considerably more than your neighbor did for his new home. You also need to be prepared for what the bank will require. The banks are going to require a significant down payment in order to offset the difference between the appraisal and the cost to build.
Keep your seat belts on folks, this roller coaster ride isn’t over yet and it’s likely not to end for some time.