Buying or building a home continues to get costlier

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High demand created the housing bubble in the mid-2000s. When the economy took a hit, the bubble burst, and by January 2009, the supply of available homes hit a record high of 12.2 million. In March 2021, the pool is at 2004 levels, with 3.6 million available units. The limited availability of homes and the soaring costs of raw materials for new construction have caused home prices to increase to record levels.

At the center of it all? The coronavirus pandemic.

COVID-19 created odd circumstances for the housing market in 2020. As office complexes shut down, more and more people worked remotely. Many companies began to allow employees the perk of working remotely indefinitely, without an end in sight for when offices would reopen. That created an opportunity for people to move anywhere they wanted, leaving their rentals and purchasing homes instead.

At the same time, existing homeowners, wary of the effects of the pandemic, have been reluctant to sell, thereby creating a scenario for higher prices. According to the St. Louis Federal Reserve Economic Data, the median sale price of a house at the end of the second quarter in 2020 was $323,000. By the end of 2020, it jumped to $359,000. Homebuyers are snapping up the limited supply by paying more than the asking price, forgoing home inspections, or paying cash.

According to Redfin, a Seattle-based real estate broker, 45% of houses have sold above their asking price through April of this year, an all-time high and an 18% increase over 2020. Listed homes remained on the market for a median of 21 days, the shortest since 2012. Existing home sales were down 3.6% in March 2021, and the National Association of Realtors reported that there are more registered real estate agents in the United States than houses to sell.

Experts hope that a more robust economy and slowly rising interest rates will put the brakes on the soaring prices. Still, they expect prices to continue increasing but at a slower pace.

The issue doesn't get much better for people looking to build new homes. The cost of raw materials has risen sharply since the start of the pandemic. The National Association of Realtors said the price of lumber has increased 250% since April 2020.

According to National Association of Home Builders Chairman Chuck Fowke, that's having a significant impact on the cost of building a new home. “The elevated price of lumber is adding approximately $24,000 to the price of a new home,” Fowke told the real estate news site HousingWire.

Ironically, while lumber prices are soaring, tree growers have taken a hit as their inventory remains high. According to TimberMart-South, a pricing service affiliated with the University of Georgia's forestry school, logs for softwood lumber averaged $22.50 a ton last year. That's the lowest price since 1992. When adjusted for inflation, it's the weakest in 50 years.

It's the sawmills seeing the profits due to demand and a lack of production. When the pandemic hit, sawmills across the country shut down. Once reopened, many operated at capacity but have had to contend with pandemic precautions, including social distancing, which is still slowing production.

The price volatility has created rifts between builders and owners, as the latter is often not willing to compensate builders for increased costs as most contracts are on a fixed price basis. However, builders are beginning to add what is known as an “escalation clause” to the agreements, making the owner responsible for some of the increased costs of materials after passing a particular percentage or price threshold. Other builders are preordering lumber, getting price guarantees from suppliers, or delaying building and sales when the costs spike.

The tariffs the Trump administration slapped on Canadian lumber imports have also played into the cost increases. While the administration cut the tariff in December 2020 from 20% to 9%, the Biden administration is getting urged to do more.

In February, the Associated General Contractors of America released a statement calling on President Joe Biden to remove the remainder of the tariffs on Canadian imports. Stephen Sandherr, the association's CEO, said, “Widespread harm is caused by maintaining tariffs on products that so many Americans need to improve their houses, modernize their infrastructure, and revitalize their economy.”

In a separate letter written to the president, Sandherr offered up other suggestions, including “easing cross-border truck and rail shipments, unloading at ports, hauling of logs and other raw materials to mills and engineered-wood producers, and shipping wood products to distributors and construction sites.

Members of Congress have also asked the administration to step in. Reps. Jim Costa, a California Democrat, and Jodey Arrington, a Texas Republican, wrote a letter to the president and the Justice Department to offer possible solutions to the rising prices.

“Unfortunately, this unprecedented price increase on new homeowners, as well as home builders, will persist until new sawmills come online, and current mills reopen and operate at full capacity,” Costa and Arrington wrote. “To address this issue, we ask your Administration to facilitate a discussion with all stakeholders, including sawmills, home builders, loggers, and distributors, to ensure all needs are met in a timely manner.”

So far, the administration hasn't shown any urgency to intervene. The administration has floated a $15,000 tax credit for first-time homebuyers. While that might make it more affordable for some families to buy a home, it doesn't address the underlying lack of supply or the cost of materials to build a new home.

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