Anyone hoping builders will be putting up enough houses to alleviate the shortage on the market may just as well wish to see the tooth fairy. According to one longtime industry observer, it ain't gonna happen -- at least, "not anytime soon."
The number of actively selling subdivisions is off 30% since 2019, reports Tim Sullivan of Zonda, a marketing and analytical firm that monitors 18,000 active communities throughout the country. And the number of buildable, developed lots is slowly diminishing.
"We're not doing a good job" replacing what is being sold, Sullivan said in a recent Zoom presentation for his clients. "We don't have enough product."
At a time when builders should be rejoicing because they're selling everything they can put up, they are lamenting the fact that they can't put it up fast enough to satisfy the insatiable demand driven by near record-low mortgage rates, the desire for more functional space and the lack of existing houses for sale.
At a new community in a remote suburb of Dallas, for example, a builder recently used a lottery system for a chance to buy one of only 30 houses. Buyers had to be present and approved by the builder-owned mortgage company to win a spot.
When Nav Singh, an agent with HomesUSA, arrived with his client more than an hour before the drawing, about 70 people were already in line. By the time the drawing began, the line had nearly doubled. It was "the craziest thing I have ever seen," he says.
Builders are beset by all kinds of stumbling blocks these days, not just too many buyers. Here's a recap of Sullivan's look at some of them:
-- The Three L's. "Location, location, location" used to be the most important words in housing. But it hardly matters these days in the new-home market. Zonda research shows that 70% of the bestselling communities are 30 miles or more from central business districts.
In Houston, for example, properties within 10 miles of downtown are notching 1.1 sales per month, while those 30-35 miles out are grabbing 4.3 deals monthly.
Nowadays, the three L's stand for lumber, lumber, lumber. Sullivan said he's heard that the cost of complete framing pods is up 150% year-over-year. And the National Association of Home Builders reports that prices have tripled over the last 12 months, adding tens of thousands to the cost of a typical house.
The primary reason: insufficient production due to stay-at-home orders. In many cases, mills have yet to ramp back up to full capacity. Another factor: import duties placed on Canadian lumber during the Trump administration. At current prices, builders are paying about $48,000 for the softwood lumber in an average single-family home.
-- Availability. Prices are up for almost all building products -- gypsum and ready-mix concrete, in particular -- if you can find them. Eighty-six percent of builders told Zonda they are experiencing supply disruptions resulting in significant construction delays. Among the components that are tough to obtain are interior doors, appliances, windows, shingles and cabinets.
-- Higher prices. Zonda research shows 97% of builders have raised prices, half of those by $10,000 or more. But, said the company's chief economist, Ali Wolf, "There's virtually no sticker shock."
Even as builders restrict supply, prices continue to march higher. One reason: The market is supported in large measure by out-of-towners moving from places where housing prices are out of this world. For example, a 2,500-square-foot house that costs $1.16 million in San Francisco or $1.14 million in Los Angeles runs a mere $450,000 in Austin, Texas.
Because many people can work from home and believe they will continue to be able to do so, they are taking their profits and moving to less expensive places. And that's why locals are buying farther and farther out, where the prices are lower.
-- Land. "Builders are paying stupid land prices," Sullivan told his clients, but they almost have to if they want to remain in business. Why? Because the supply of home sites is dwindling rapidly.
Zonda says roadwork has commenced on just 165,000 lots nationwide. Considering that some 500,000 new homes are sold annually, that's not a lot (pun intended).
About a third of builders polled said they expect this will be an issue next year, as well. Said Sullivan: "The under-supply isn't going to go away."
-- Labor. Experienced carpenters, plumbers, electricians and other tradespeople are in short supply. But only 49% of builders said that's a big deal right now, probably because they're beset by other, more pressing problems and because they're not erecting houses as fast as they'd like.
-- Slowing down. To protect against getting too far ahead of themselves, a majority of builders are taking only a specific number of contracts per month. While 9% said it's still business as usual, 17% said they are accepting offers only as new lots become available, and 13% said they are pausing sales or reservations.
At the same time, cancellations are no longer a bugaboo to builders. They're still a four-letter word, but now that word is "good," because it allows builders to re-price to reflect their increased costs.
-- Appraisals. While today's homebuyers are among the most qualified ever -- "They have to be the cream of the crop," said economist Wolf -- 50% of builders complain they are being stymied by valuations that don't jibe with rising prices.
In one North Carolina case, the valuation of a new build that reflected current pricing came in $10,000 lower because the appraiser based the valuation on the same model that sold just three months earlier. Now that builder refuses to quote prices until all the costs are verified.