While Coronavirus is sweeping the globe and shutting down businesses, there is one industry that shows no signs of slowing down: Real Estate.
Initially, many pundits were predicting a crash for 2020. However, the housing market has been lagging the demand for new houses since the crash of 2008.
Following the 2008 housing crash, many people retired from construction. This lack of manpower slowed the building of new houses, while the demand continued to increase.
The increased market pressure caused contractors to raise their rates continually. Housing costs have exploded with new construction topping $200 a square foot in the Midwest.
When the concerns surrounding the 2019 Coronavirus began causing business closures, many construction projects were paused. This added further pressure to the housing market.
After a slight leveling of the market in March 2020, the demand for houses resumed in force, with the demand for housing climbing by as much as 20%.
In fact, for the first time ever, the median home price in America surpassed $300,000.
Meanwhile, the construction industry continues to lag behind the demand, with crews working 18 hour days and the demand for their work backlogged by several months.
There has been a 30% increase in new house sales over the previous year, creating a negative backlog in houses. New buyers are putting their money down and waiting a year for their house.
This high demand for new houses is fueling a lumber price hike. There was a little dip in the early days of the Coronavirus crisis. However, the industry quickly recovered, and prices climbed by 110%, according to the National Home Builder’s Association.
The current price per board foot is at an all time high. It reached $641.60 per thousand board feet, eclipsing the previous high set in 2018 of $639. The 2018 price was set when a combination of tariffs and forest fires drove prices up.
The temporary closing of sawmills due to coronavirus panic has only served to strengthen the market. Their closure created an artificial shortage in an already tight market.
We also see record-low mortgage interest rates. These low rates are driving the demand for new houses, used houses, and home remodels. As homeowners use the easy money to get their projects completed, the lumber market continues to climb.
The greatest impact will be felt in the residential market that relies heavily on wood for its construction. Commercial markets use steel and concrete and are less likely to be impacted.
We see a higher than evidence confidence score in the market for new homes. With homeowners locking in their projects while the prices are low, contractors have guaranteed paydays for the next 18 months while they try to catch up with the backlog.
One of the challenges homeowners are going to run into is price overruns. With both contractors and lumber yards raising their rates, it is common for 2020 building projects to run 90 days behind and with a 40% increase in cost.
This increase gets passed onto the buyer, and they will likely find themselves either asking the bank for more money or choosing lower-quality finishes on countertops and flooring.
The last time we saw this increase in 2018, homeowners chose to build smaller houses, reducing their costs by reducing their home’s footprint.
One subdivision in Pensacola Florida, has slowed to a crawl. “They get the footings in pretty quickly, but then the framing seems to stall out,” says Zachary Drumm, local resident and owner of ToolTally.com. It seems like the framing crews can’t get a house up fast enough, and sometimes I see them getting pulled from job to job.”
Outside of the professional building industry, there is also a heavy demand for lumber for outdoor projects. Homeowners are getting those gazebos, storage sheds, and fences built or repaired.
This demand could lead to an added strain on the environment. Right now, we’re growing 15% more trees than are being used. But if this 30% demand rate continues, we could outstrip the trees’ growth rate in a couple of years.
The good news is that tools and other building materials seem to be holding steady, at least for now. Contractors can get there track saws and table saws for about the same price, and their crew’s wages are similar.
This creates the potential for businesses in the construction industry to come out slightly better, if they can maintain their rates, keep their teams operating at the breakneck pace, and maintain good relationships with homeowners stressed by rising prices.