The Rising Cost of Single-Family Homes by Will Weitzel

The Rising Cost of Single-Family Homes

by Will Weitzel

This post focuses on two factors that have significantly impacted new single-family housing prices and how they came about. First, the increase in the cost of lumber due to supply issues, along with other factors, within the lumber industry. Second, labor supply shortages in construction.

In order to discuss the rise in the cost of a new single-family home in the US, the effects of the pandemic must be acknowledged. Over the last two and a half years, the pandemic has been the backdrop for significant changes in the U.S. economy. In 2020 and 2021, the annual average mortgage rates were at 3.11% and 2.96%, respectively, which made purchasing a home at this low rate more feasible. Furthermore, people began to leave large cities for more space. Some people also decided to repair or add to their houses to accommodate the new remote teaching and working world. While some of these factors have changed, mortgage rate increased with inflation to an annual rate of 4.65%, people returning to cities, and remote learning and working have become more hybrid, new single-family housing prices still remain at an all-time high.

While it is natural for the price of new single-family homes to rise year after year, the dramatic increase is the largest in a nearly 70-year data set. The average sales price in 2020 for a new single-family house was $391,900. In 2021, the average sales price jumped nearly 18% to $464,200. For reference, the 18% increase is the largest single-year increase in the data set dating back to 1963, with a 15% increase from 1976 to 1977 being the second closest.

Lumber’s price has been quite volatile since March 2020. From September 2018 to March 2020, lumber was roughly $400 on average per 1000 broad feet, with a low of $304 and a high of $448. In March, lumber started at $407 and fell to $264. Since March 2020, lumber’ price has increased significantly, with a peak of $1645 in May 2021 and a low of $456 in August 2021. The cost of lumber is not the only volatile aspect of this good. Supply is an issue as well.

When the pandemic began, sawmills and timber suppliers scaled back operations due to an uncertain future and a likely decrease in the demand for lumber due to an anticipated decline in construction. However, while the supply was scaling back, demand was increasing. Homeowners began a home renovation boom. Along with home improvements, low-interest rates spurred the construction of new homes. The demand for lumber continued to increase during the pandemic, despite supply shortages, likely causing a rise in the price of lumber.

Not only did the lumber producers cut their supply, but timber operators cut their transportation staff. Recently, as sawmills attempt to increase production, timber operators are having a difficult time finding qualified truck drivers “due to widespread labor shortages as well as inflated diesel costs,” which in turn makes shipping raw materials to sawmills for lumber production less profitable. With fewer drivers and overall means of transportation, the producers have a more difficult time getting lumber to the dealers.

The market itself is not the only factor leading to the volatility of lumber prices. More recently, major producers of U.S. lumber in British Columbia, Oregon, and Washington have had record temperatures leading to fires. British Columbia exports 90% of its lumber, and half goes to the U.S. Supply shortages, constricted transportation lines, and natural disasters have a compounding effect on lumber's volatile price leading to an increase in the cost of new single- family homes.

Not only does the transportation industry have a labor shortage, but so does the construction industry. In March 2020, open construction jobs for both residential and non-residential was 238,000, and it almost doubled to 447,000 in March 2022. A three key factors have brought about this change. First, training programs for the construction industry have been slow to restart in the wake of the pandemic. Second, wage increases for construction have increased by 7.9%, but other sectors are pulling potential workers away from construction with higher wage increases. For example, transportation and warehouse wages have risen 12.6% and do not require four-year degrees. Finally, the decrease in international migration has contributed to the lack of workers. Migration has fallen roughly 75% between 2016 and 2021, due in large part to the pandemic’s travel restrictions. The international workforce has been an “important source of talent for engineering, design, and contracting activities.”

The price of a new single-family home has many more factors than the two discussed, but the materials and the workforce are two of the primary motivators in driving up new housing prices. These factors bleed into other areas that compound and expand the costs, such as worker productivity and delays in construction time.