Higher Lumber Costs, Higher Interest Rates as Economic Growth Picks Up

The surprise expansion of home building in 2020 brought a significant amount of demand-side momentum into 2021. Historically low interest rates and a growing preference for larger homes in more affordable locations boosted residential construction. Indeed, survey data from NAHB indicate that at the start of the year, 43% of new-home sales were to first-time buyers — a substantial increase over the 32% reading from fall 2018. And data from the Home Building Geography Index show the suburban shift had a clear impact on construction, with single-family permits up 15.7% in small metro areas, compared to a 9.1% gain in large metro areas.
 
Nonetheless, housing affordability is likely to decline this year due to higher construction costs and higher interest rates. As economic growth expectations for 2021 increase (GDP growth will be at least 5% this year), interest rates have moved forward as well, with the 10-year Treasury rate now above 1.6%. The bond market is thus signaling a 30-year fixed-rate mortgage of 3.3% in the near-term. Moreover, construction delays and cost increases continue in the face of growing demand. Lumber costs are now nearly 200% higher than they were in April 2020, adding approximately $24,000 to the price of a typical new home. NAHB survey data indicate that 90% of builders report delays with appliances. Combined with broad shortages of lots and skilled labor, new-home prices are headed higher.
 
These developments led to a two-point drop in the NAHB/Wells Fargo Housing Market Index (HMI) measure of single-family builder sentiment, as the current sales index declined. This pulled the March HMI to a level of 82, a positive reading nonetheless, but lower than November's all-time high reading of 90. And housing starts declined in February, largely because of material concerns and winter storm Uri (Texas accounts for 16% of the nation’s single-family construction). Total housing starts pulled back 10% and the count of single-family homes permitted but not yet started is up 36% from a year ago.
 
As markets adjust to a new normal in 2021, affordability will be key. New NAHB research revealed that for every $1,000 increase in home prices, an additional 154,000 households are priced out of the market. The research also shows that 75.1 million households are currently unable to afford a typical newly-built home, a metric that is sure to increase as building costs rise.  
 
–NAHB Chief Economist Robert Dietz