New homes won't be any more affordable in a year or two.
Potential homebuyers who are waiting for costs to come down before building might want to reconsider. The fact is that the past year's rise in new home prices will most likely continue. While higher interest rates and a weak dollar could play a role, the biggest factors will likely be the most basic ones of supply and demand.
Simply put, the homebuilding industry predicts buyers will demand as many as 1.5 million new homes next year -- this pent-up demand has saddled some builders with lengthy backlogs. At the same time there has been a serious shortage of labor and materials.
When it comes to labor, the pendulum has swung. Two years ago, contractors were short on work and willing to accept wage cuts. Now builders are hunting for skilled labor. The downturn saw legions of carpenters and other skilled workers leave the construction industry. The ones who remain are commanding higher wages. The same is true for quality subcontractors such as electricians, plumbers, and drywallers, who often have more work than they can handle, and have raised their prices accordingly.
On the materials side, lumber shortages drove prices in early 2013 to double that of a year earlier. And lumber is a bellwether: the costs of other building materials, from cabinets to carpet to light fixtures, tend to follow its lead.
There are several reasons for the lumber crunch. A number of mills closed during the housing crash when demand was weak. Some of these mills have re-started, helping to lower prices a bit from the recent peak, but tight credit has slowed the process, according to the National Association of Home Builders. It will take time for the industry to ramp up to the needed capacity.
Even if all available mills were operational, there isn't as much harvestable lumber as there was a few years ago. For instance, mountain pine beetles have devastated millions of acres of timberland in the northwestern U.S. and Canada, while Canadian provinces have ordered permanent harvest reductions from healthy forests.
These forest losses have come on the heels of increasing demand for lumber from China, India, and other countries. In fact, many experts believe that lumber availability and pricing over the next few years will be driven as much by global as by domestic factors, and that it could take five years for supply and demand to balance.
What does all this mean for homebuyers? With prices predictably on the rise, value engineering is becoming ever more important. Value-engineering is a service provided by builders who look for ways to economize without sacrificing amenities or quality. There are lots of ways to do this. One example is to reduce exterior wall space by simplifying the facade. Exterior walls cost a lot more to build than interior walls -- a simpler facade will have fewer corners, nooks, and crannies, requiring less labor and materials to build. The ability to value-engineer is one of the many benefits of working with a professional builder.
The bottom line is that while getting into a new home may be more expensive than it was two years ago, waiting for prices to come down is a roll of the dice -- with odds of winning that are probably less than those at a Vegas casino. Anyone considering building in the near future would be well advised to do it sooner rather than later.
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