Episode Details

The housing market may be slowing down, but new homes are still a complicated, expensive process, mostly because of supply chain issues. One Bank of America analyst, who co-authored a new report on residential construction, says it's like a game of whack-a-mole. He says: "Every time they find one thing that they fix, another one pops up."

Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.

BofA just released its 2022 "Who Builds the House" report, which found that a shortage of building materials is one of the primary reasons for higher home prices. According to co-author Rafe Jadrosich, prices have risen at an "unprecedented rate" over the last few years because of the shortage of building materials. He told MarketWatch: "There's always a new category that's creating the bottleneck." (1)

"Who Builds the House?"

The report says that the cost of materials to build a home went up 42% in just three years, from 2018 to 2021, and that it has consistently outpaced the rate of overall inflation. Additional costs for materials add approximately $35,000 to the price tag, and bring the total amount for raw materials to around $118,000. That's about a third of the cost of a new home. The other two-thirds of the cost go towards the land, and the labor, which can vary from region to region.

Rising inflation is also contributing to higher costs for all the things needed to finish a home including window treatments, floor coverings, appliances, and household furnishings. MarketWatch reports that the index for household furnishings and operations rose .04% in May with an annual rate of increase of 8.9%.

The BofA report used data from the National Association of Home Builders, and analyzed 14 different expense categories, to determine how much it costs, on average, to build a new home.

Framing Lumber and Engineered Wood

The dominant category is the lumber needed to frame a home. Nine out of ten homes are framed with lumber. That can be natural wood or engineered wood, which is a mixture of wood fiber and plastic. The report says 30.2% of the material used to build a home falls into this category. The cost for this portion is about $35,500, and right now, lumber prices are falling. But they've also been on a roller coaster. Lumber futures have come off a high of about $1,700 for a thousand board feet in May of last year. They were recently down to about $580, but in April of 2020 they were half that amount.

Lumber prices are moving contrary to inflation because of a drop in home sales, and a cut back in home starts by builders. Home starts dropped a whopping 14.4% from April to May due to a slowdown in construction for both single-family and multi-family homes.

Higher mortgage rates are contributing to the housing market slowdown. Housing experts are predicting that lumber prices will come down farther, but builders are still dealing with high prices for other materials.

Concrete for the Foundation

Concrete accounts for another big expense category at almost 9% of the total cost of materials. It typically costs around $10,500 for the concrete.

Windows and Doors

Windows and doors are a big expense. They account for another $10,500 or about 9% of the cost of materials, but those costs are under pressure because windows and doors are consistently hard to find. Builders have been scrambling over the last year to get what they need to finish homes.

As Jadrosich explains, if you haven't installed the windows: "You can't put your appliances in, or paint your walls, or finish your floors." He says until that situation improves, "you're gonna have a pretty slow, elongated build cycle for a lot of the home builders."