Builders Grapple With Land Shortage, Soaring Lumber Costs

Long Island Construction Law does not own this content. This content was created by the Associated Press and was published to the Long Island Business News on March 22, 2021.

U.S. home builders are poised to benefit this spring home buying season amid strong demand, low mortgage rates and an all-time low inventory of previously occupied homes for sale. But soaring lumber prices and a shortage of construction-ready land could limit their ability to capitalize on the strong housing market trends, analysts say.

The price of lumber more than doubled over the last year to an all-time high, reflecting strong demand for new construction and home remodeling, and pandemic-related problems limiting production. The sharp rise in the cost of lumber, among other building materials, is a concern to builders because it drives up costs, potentially shrinking the pool of would-be buyers who can afford to purchase a home.

Builders are also grappling with a shrinking supply of developed lots, or land that’s ready for construction. Ali Wolf, chief economist at housing market data tracker Zonda Economics, forecasts that new U.S. home sales will rise 5% this year over 2020. That would be a far slower pace of growth than the nearly 20% jump last year from 2019.

“Supply is the limiting factor,” Wolf said. “If builders had more homes to sell, sales would be higher.” Robert Dietz, the National Association of Home Builders’ chief economist, hasn’t issued a forecast, but also expects sales to grow at a slower pace, despite an overall strong housing market. “The homebuilding market is going to grow in 2021, but the growth rate itself is going to be lower than what we experienced in 2020, due to the fact that these housing affordability headwinds like lumber, a lack of lots, are becoming more binding this year,” Dietz said.

The housing market mounted a strong comeback last summer after declining sharply in the spring when the coronavirus outbreak hit. Sales of previously occupied U.S. homes surged last year to the highest level since 2006 at the height of the housing boom, according to the National Association of Realtors. Sales of new homes, meanwhile, jumped 19% in 2020 over the previous year, according to the Commerce Department. New home sales climbed a further 4.3% last month. Several market trends are driving strong demand for homeownership. Mortgage rates remain at historic lows. Americans forced to work from home in the pandemic are seeking larger homes. And more millennials are entering the market.

Other trends, including an all-time low inventory of resale homes of 1.04 million (less than two months’ supply), should pave the way for homebuilders to enjoy a banner year. But those prospects have dimmed amid the industry’s land and building supplies constraints.“You’ll see (housing) starts and sales grow more slowly than they could if we didn’t have these issues with availability of land and availability of materials,” said Carl Reichardt, a BTIG homebuilding analyst. While the price of lumber, cement and other construction materials fluctuate constantly, the volatility has worsened over the past year as the coronavirus pandemic led to factory closures, a shortage of truckers and other logistical issues that have made the normally smooth supply chain unpredictable. That’s meant shortages in items like windows and faucets, translating to higher costs and delayed construction projects.

The pandemic has also left some municipalities short-handed, which can mean delays in approving building permits, inspections or the process needed to get land cleared for new construction. For builders having to deal with such obstacles, this means more delays, uncertainty and difficulty in getting a home completed on time and on budget.

The rise in lumber prices, a consequence of many mills running at less than full capacity due to the pandemic, has been particularly worrisome for builders. A key building material used in framing new homes, it has been on a tear since April. It settled last month at $1,018.10 per thousand board feet, just below the all-time high it set a day earlier, according to FactSet. This surge in lumber has added more than $24,000 to the price of an average new single-family home, Dietz said.

“Costs are going up, it’s taking longer for materials to arrive, and it’s particularly acute in the lumber market,” he said. For some builders, finding land to build on is a bigger problem. Many builders tapped their own supply of construction-ready land parcels much faster last year than they anticipated in order to meet the strong demand. And some stopped buying land altogether for weeks after the pandemic struck in order to limit spending amid uncertainty about when housing demand would recover.

“The housing market was hotter than we all expected,” Wolf said. “And builders and developers burnt through lots quicker than anticipated.” The number of lots available for new home construction has fallen steadily for years, reaching 630,800 last year, according to Zonda Economics. That’s down from 731,689 five years earlier. It can take a year or more to clear the hurdles required to turn raw land into a new home development. The demand for lumber and other building materials has helped lift shares in companies that supply the construction industry. Weyerhaeuser, Rayonier, PotlatchDeltic are each up more than 26%, while Builders FirstSource is up 66.3%.

Homebuilders that have enough land to continue to grow their orders and their earnings are likely to have a better year than those who sold out their land, Reichardt said. He has a “Buy” rating on D.R. Horton, Lennar, PulteGroup and Taylor Morrison Home.

John Caravella, Esq

John Caravella Esq., is a construction attorney and formerly practicing project architect at The Law Office of John Caravella, P.C., representing architects, engineers, contractors, subcontractors, and owners in all phases of contract preparation, litigation, and arbitration across New York and Florida. He also serves as an arbitrator to the American Arbitration Association Construction Industry Panel. Mr. Caravella can be reached by email: [email protected] or (631) 608-1346.

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Long Island Construction Law does not own this content. This content was created by the Associated Press and was published to the Long Island Business News on March 22, 2021.

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