Residential construction spending reached its highest level in at least 28 years in July. That would be welcome news for homebuyers waiting for more inventory to come online, but there’s one problem.
The additional spending isn’t translating more available homes. It’s translating into more expensive homes.
Builders are spending more than $225 billion more to complete 700,000 fewer single family homes per year than they were in 2006, according to data from the US Census Bureau. In that time, the median sales price for a new home has increased by more than $100,000.
The trend is only increasing during the pandemic. In the last year, builders spent an additional $164 billion to increase the seasonally adjusted annual rate of single-family home completions by a meager 6,000 units.
Pandemic-caused inflation and a record-breaking summer housing market largely deserve the blame for the disconnect in 2020 and 2021.
Supply chain issues caused lumber prices to spike in late March and peak in early May. That showed up in April housing reports as the annual rate of single-family home completions began to stair-step downward while construction spending continued to climb.
And lumber isn’t the only building material that’s causing issues. Steel, gypsum, and concrete are all more expensive than they were last year. Labor and lots to build on have also been hard to come by in the last year, adding time and cost to the home building process.
July brought some good news. The annual rate of single-family home completions increased by 74,000 units, suggesting some of the supply chain wrinkles — specifically for lumber — are starting to smooth. But a look at the last 15 years shows that the pandemic isn’t solely to blame for the high cost of residential building.
The 21st century has been one of extremes for the housing market. In December 2006, builders were completing single-family homes at a rate of 1.6 million per year and spending less than $550 billion.
After the market collapsed, builders were hesitant for the next several years, eventually leading to a shortage of homes and increasing prices.
The pandemic-fueled the opposite extreme. In July 2021 builders are on pace to spend $775 billion to complete less than 1 million single-family homes.
While there are signs of progress in supply chain issues and labor shortages, there are long standing issues that need to be addressed in order to make new homes more affordable, in addition to the unforeseeable impacts of the Delta variant.
For one, new single-family homes keep getting bigger. The median new home size increased by more than 2,000 square feet from 1999 to 2019. Materials and building codes have also improved in that time, adding to the time and cost of home building.
The good news is that home builders are clearly trying to bring more inventory online. Even if new homes aren’t as affordable for first-time homebuyers as they once were, they should free up existing home inventory. And as the short-term effects of the pandemic wane, building costs and home prices should settle into a new normal.