June 17, 2021
CEO and Founder of Signature Homes
Home prices today are shocking!
If you are looking for a new home, it is very clear that prices are extraordinarily high. In most existing neighborhoods when a home comes on the market today, there are usually multiple offers, and they are significantly higher than the asking price. On the other hand, new construction homes are very scarce. Most builders have no completed homes available. This can make buying a home today very frustrating.
Our country has gone through 18 months of fear and uncertainty. Covid changed our world forever and many theories have Covid as the reason housing prices jumped.
The real reason is simply a lack of supply of new homes to meet the demand of a strong economy and a demographic change nationally.
Many factors are contributing to the high housing demand, but the major reasons are discussed below.
The baby boomers were the first wave of demographic changes in the country, and they also make up a huge portion of current homebuyers. Millions of boomers are now starting to buy homes that fit their current lifestyle (downsizing). Luckily for them, the strong housing market will make selling their current home much easier, and they will have a significant amount of equity to buy new. Boomers desire single-level homes with no steps, and unfortunately, not many homes fall into that category. Due to the lack of single-level homes, many boomers prefer to build new construction.
About 80 million millennials are entering the market to purchase homes. Millennials as old as 37 are in the market for buying a home. The millennials make up such a large group of new buyers entering the market. Thus, demand for a home is far higher than home availability.
The cost of construction has grown exponentially and has had a significant impact on the housing market. The main reason being…lumber. Also, framing lumber has increased 5 times in cost. Consider this: we use about 300 pieces of exterior sheathing (OSB). The price in June of 2020 was about $8.50 per sheet. Today, the price is around $60.00 per sheet. It is expected that lumber will decline somewhat, but based on current sentiment the prices will still be easily 250% higher than their low in 2020.
On average, due to the high costs of lumber, our average cost is up $60,000. Also, other components are rising at about 15-18%.
Low mortgage rates are still affecting the housing demand. Rates will rise in the future which will slow the rate of appreciation. However, the number of people who need housing will not diminish.
There are about 1.2 million new household formations nationwide, and that number is expected to remain constant for many years. With current shortages of homes built, the expectation for new homes needed is about 1.6 million yet, the number of homes started each year is only around 1.3 million homes. The National Association of Realtors estimates that there is a deficit of 5.5 million homes needed to meet demand.
At large there are simply not enough homes to meet the demand of the demographic changes and it is expected that higher prices will be the norm for the next few years. Our biggest hope is that the rate of the cost will not rise as fast.
Prices will not keep rising at the pace they have in the last year. Based on strong demographic needs, an economy that continues to strengthen, strong job growth, household formations, and a nationwide deficit of 5.5 million homes needed, the price of homes will not reduce materially.
Homebuilders will continue to try to increase the number of homes they build, and suppliers will increase their production capacity, but it will take several years.
The advice I would give to any prospective buyer is to do your homework and to be knowledgeable about the value of existing homes. Lastly, if you buy new, look for a builder with a solid reputation.