Housing stock remains close to record lows: According to NAR, months of sales of existing homes are down 36%, from 3.3 months to 2.1 months.
Now that the existing housing stock is so low, many hope that new construction can come to the rescue. If people don’t sell houses, at least new houses will come on the market and increase the stock, right? And with more inventory, the crazy price hike we’re seeing will slow down, right?
If only it were that simple.
Housing is starting to recover
The good news is that the number of new homes has recovered to pre-pandemic levels, despite a short step back in March.
This is good news for long-term stock growth, but unfortunately it won’t help in the short term.
According to the US Census Bureau, it takes about eight months to build a new home. This means that homes now entering the market started in the fall of 2020, when home starts were lower than what we saw before the pandemic.
It wasn’t until December that the start of new housing reached the point where we were in January and February 2020. The larger increase in the supply of new construction will probably not come on the market until after the summer.
Will the new inventory help?
Then there are the questions of how much these houses will cost and whether the new inventory will actually help cool the market.
I do not think so.
The wood problem
Wood prices are insane right now. I’m not claiming to be an expert on wood pricing, but from what I understand there are two primary issues.
First, timber producers halted production at the start of the pandemic, expecting demand for new homes to decline for a long time. Oh, how wrong they were.
There was a brief slowdown in the market in Spring 2020, but we all know what’s happened since then. The housing market has skyrocketed. This frenzy encourages builders to build, increasing the demand for wood.
Demand is rising while supply is low. A perfect recipe for rapid price growth.
It also appears that there is a labor shortage in the timber industry, preventing producers from meeting demand as quickly as in a healthy market.
According to CNBC, increased wood costs add an average of about $36,000 to the price of new homes.
While we should see some more new building stock hitting the market in 2021, it’s unlikely to cool the price hike we’re seeing now. Instead, it could add to it as homebuilders pass their additional material costs on to buyers.
What this means
All of this confirms my hypothesis that the red-hot housing market will not slow down until the fall. In any case, I think we will continue to see a very hot, competitive market during the typical busy season from June to August.
After the summer, the market is likely to slow down to a more normal level. It’s unclear if wood prices will come down a bit by then, but we can expect the stock to rise 10-20%, which should have a cooling effect.
We need the housing market to cool down. Of course, if you own a number of properties, you will now see great appreciation. But such activity and valuation levels make it difficult for new investors to enter the market and for active investors to grow their portfolios, and will only exacerbate the affordability problems of our US homes.
Let’s all hope the stock recovers soon.