Rising costs of building materials threatens housing affordability

Robert Dietz, chief economist with the National Association of Home Builders, says builders are facing challenges such as a skilled labor shortage and, most serious of all, the rising cost of building materials. These problems threaten to erode housing affordability even more.

“The challenge right now is lumber cost,” said Dietz.

At a recent Silicon Valley Association of Realtors district meeting, Dietz said due to its limited supply, the cost of lumber has skyrocketed. Lumber prices have increased 194 percent in one year, increasing the cost of an average home by $24,000. To add to this, Dietz said regulatory costs, which are a total effect of building code, land use environmental and other rules, are rising. They are currently up 29 percent over the 2011-2016 period.

The NAHB outlook indicates vaccine data is showing promising gains over the virus and this will help lead to accelerating growth in 2021 but with increases in interest rates. Single-family construction, as well as remodeling, will grow, but at lower growth rates than in 2020.

Single-family housing starts hit the one million level in 2020, a 12 percent gain from the previous year. Housing starts only grew an average of 2 percent in previous years. NAHB expects the growth rate to drop to just 6 percent or 1,058,000 units this year due to material costs and delivery times, a shortage of buildable lots and regional labor shortages.

Asked why lumber prices are rising, Dietz said the country is importing less lumber from Canada and domestic production of lumber has dropped. He noted, “There is a bad logistics chain when it comes to lumber.”

Wood framing remains the dominant construction method for single-family homes, said Dietz. Ninety percent of homes are wood-framed, 10 percent are concreteframed homes, and less than half a percent are steel-framed.

Residential remodeling grew 7 percent in 2020, but costs and the inability to get appliances in on time could stifle further growth in 2021. Dietz, however, is optimistic about future growth in remodeling as the workfrom-home trend caused by the pandemic has led people to use their homes for more purposes. Since they have been spending more time at home, homeowners are looking to improve their homes, such as adding an extra room or converting a room to an office.

The NAHB chief economist added that 15 percent of single-family dwellings are being constructed as multi-generational homes. A National Association of Realtors Home Buyer and Seller Generational Trends survey indicates the preference for multigenerational homes is rising because this type of housing provides more solid economic footing for families, allowing them to spread the high cost of a mortgage across multiple income-earners, as well as provide more support for older parents.

There also has been a rise in accessory dwelling units. Dietz said the median cost of 20 percent of remodels is $150,000.

Looking forward, Dietz said he sees conversion of commercial to residential as an emerging trend. “I see a real future in the conversion of vacant retail and office space to urban villages with for sale town houses in the next three to five years.”

Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.silvar.org. Send questions on any topic to rmeily@silvar.org.