Inventory Insanity: The Secret Economic Forces Fueling the Housing Shortage

17930 Kelok Rd, Lake Oswego, OR 97034
Presented by Laura Piccard | Offered at $2,750,000 | MLS# 21518152

From Inman

Many consumers may not realize it, but they’re increasingly competing against institutional investors and contending with soaring building costs.

Agents are exhausted and consumers are stretched thin. But despite everyone being fed up, the ongoing housing supply shortage drags on with no end in sight.

As Inman has previously reported, the problem is multifaceted. The coronavirus pandemic, for example, has reshuffled job markets. And at the same time, a years-long building shortfall and wave of millennials hitting homebuying age has further exacerbated the problem.

But those aren’t the only issues. In fact, there are multiple other forces that have, perhaps inadvertently, conspired to make housing both more scarce and more expensive — but which are also largely off the radar of most consumers. Despite their lower profile, though, these forces are having a tremendous impact on the housing market right now.

For our purposes here, we’ll focus on two such forces: the soaring cost of building materials, and the spiking interest in housing among investors. Together, these two things are major contributors to today’s housing market, and the lack of inventory that is sweeping so many markets.

Building supplies are getting way more expensive

The cost of building supplies has been ticking upward for a long time now, but according to David Logan — a senior economist with the National Association of Home Builders (NAHB) — the pandemic made the problem worse. That’s because the companies that make things like lumber bet that there would be a “precipitous drop in housing demand” during the pandemic, and that bet proved to be wrong.

“Producers of lumber, they shut down like most every other business needed to,” Logan told Inman. “But when production came back, mills had curtailed their production by as much as 50 percent.”

Logan called this a “fatal mistake” on the part of lumber companies, in part because demand for housing itself has surged and in part because on top of that DIY home remodeling has also become more popular during the pandemic.

The result is a kind of triple whammy where supply is low, while demand from both contractors and everyday consumers is higher than ever. It’s no surprise then that, according to Logan, the cost of lumber has tripled since a year ago.

“I would say it’s certainly unprecedented in so far as a surge of demand unexpectedly coincides with a large decline in supply,” Logan added.

Just by February, the NAHB estimated that this trend had added more than $24,000 to the cost of a newly built single-family home.

Data from the U.S Bureau of Labor Statistics further bears this out, showing that the prices for plywood, lumber, veneer, pallets and various other items have jumped up recently.

Lumber may be the most prominent material impacted by this trend, but Logan also said it is “by no means the only culprit in this increase of the cost to built a home.” Other materials that have seen price increases include concrete, the oriented strand board (OSB) that is used in home wall paneling, and many other products.

Another NAHB report further notes that the price of steel mill products has jumped 22 percent in just the last three months.

The consequences of these price increases are far-reaching. In a series of reports, NAHB has revealed that contractors this spring are now having difficult conversations with their clients about the cost of materials, and that those costs are delaying critical home repairs. The costs are also cutting into the supply of affordable homes, especially in lower-cost suburbs where wood-frame building is the most common construction method.

Logan doesn’t expect these conditions to last forever, but in the meantime he said the prevailing sentiment among builders is one of “concern.”

Institutional investors are flocking to the housing industry

At the same time that building homes is getting more expensive, deep-pocketed investors are also snapping up more and more housing. Rick Palacios Jr., director of research for John Burns Real Estate Consulting, told Inman that right now investors are buying 20 percent of all homes in the U.S. Asked if that was enough to sway prices and housing supply, Palacios answered without hesitation: “yes.”

“That percentage gets even higher in a lot of markets,” he added. “Almost a quarter of all housing transactions are going to investors.”

Palacios pointed to Phoenix as an example, saying that nearly 30 percent of sales in the Arizona city are to investors. Las Vegas, Houston, and Tampa, Florida, also all have higher-than-average numbers of sales going to investors. Many of these markets also happen to be iBuying hotspots, and Palacios said firms such as Opendoor can end up having a major impact on the supply landscape in cities where they are active.

Of course, “investors” is a broad category. Palacios explained that it includes everyone from fix-and-flip operators to iBuyers to rental companies. But the result of all this interest among investors is that would-be homeowners are facing more competition and higher prices.

A report from John Burns Real Estate Consulting — which was provided to Inman — further teases this idea out, showing that investors have zeroed in on lower-cost homes. The report also notes that “cash purchases account for 67 percent of homes sold below $100k and 31 percent of homes sold between $100k and $200k.”

Some of this investor activity makes obvious sense. Given that there is a supply shortfall, as well as soaring prices, flippers stand to make a significant profit by simply buying houses and then selling them a short time later. Palacios said places like Phoenix and Boise, Idaho, are ideal backdrops for that kind of activity.

Interest from landlords, on the other hand, may be slightly less understandable given that right now they have to pay top dollar for their properties. That contrasts significantly from the housing bubble in 2008, when institutional investors were able to snap up thousands of houses at a relative bargain.

However, Palacios said that “there’s a global quest for yield” going on among investors right now. At the same time, yields from vehicles like U.S. Treasuries have tanked while investment in commercial real estate became unappealing thanks to COVID-related shutdowns of stores, restaurants and hospitality businesses.

Residential real estate, and especially single-family housing, looks relatively safe by comparison. And Palacios said recent years have ultimately offered a kind of proof-of-concept that shows this type of investment works. As a result, institutions like pension and sovereign wealth funds — which may have mandates to invest in U.S. real estate — have increasingly gravitated toward housing. And if they have to pay top dollar for the properties, so be it because they’re in it for the long haul.

“Today’s investors are investing for both quick appreciation as well as yield and safety compared to other alternative investments,” Palacios added.

The John Burns report further notes that investors have gravitated toward residential real estate as a hedge against inflation and in an effort to diversify their assets.

This trend may not be readily apparent to consumers or their agents. When someone loses a bidding war, after all, they may never find out exactly who won. But like rising material costs, it is happening in the background and having a big impact. And that impact is likely to stick around for the foreseeable future.

“Housing investors are going wild, again,” the report ultimately concludes. “Limited new and resale housing supply, low mortgage rates, a global reach for yield, and what we’re calling the institutionalization of real estate investors are setting the stage for a home price boom that could stretch on for years, similar to the early 2000s.”

Full article on Inman


New-Home Sales Jump 19% Annually

34155 NE Wilsonville Rd, Newberg, OR 97132
Presented by Jennifer Nash | Offered at $2,100,000 | MLS# 21492103

From Realtor Magazine

Sales of newly built, single-family homes in January moved 19% higher than a year ago, as home buyers sought more options under a lean number of existing homes for sale.

Newly built single-family home sales increased 4.3% last month over December 2020, reaching a seasonally adjusted annual rate of 923,000, the U.S. Department of Housing and Urban Development and U.S. Census Bureau reported Wednesday.

“Historically low mortgage rates and solid demand spurred an increase in new home sales in January,” says Chuck Fowke, chairman of the National Association of Home Builders. “However, rising affordability issues are looming this year, particularly increasing building material costs, including lumber, which is adding $24,000 to the price of a typical newly built home. Builders also cite rising regulatory issues as a potential concern.”

As existing-home inventory remains at all-time lows, more buyers are considering new home construction, says Robert Dietz, chief economist of the National Association of Home Builders. “Though rising building and development costs, combined with recent increases in mortgage interest rates, threaten to exacerbate existing affordability conditions,” he says. “Builders are exercising discipline to ensure home prices do not outpace buyer budgets.”

Inventories of new homes also remain tight at just a four-month supply at the current sales pace. New-home inventories are 6.3% lower than January 2020.

The median sales price for a new home was $346,400 in January, up 5.3% from a year earlier.

New-home sales rose by the highest amounts in the Midwest last month, up 12.6% annually. New-home sales also posted a 6.8% increase in the West and a 3% increase in the South. The only region of the U.S. to post a decline in new home sales in January was the Northeast, where new home sales fell 13.9% annually.

Full article on Realtor Magazine


Single-family Housing Starts Reach Highest Level Since 2007

20377 S Shore Vista Dr, Oregon City, OR 97045
Presented by Brent Gunter | Offered at $3,195,000 | MLS# 20699003

From housingwire.com

According to reports from Census Bureau, single-family housing starts continued their seven-month climb in November, coming in to the highest level since 2007. Housing starts increased by 1.2% in November compared to October and increased by 12.8% year over year to a seasonally adjusted annual pace of 1.58 million starts. Single-family housing starts rose 0.4% from October and 27.1% compared to last year.

The Mortgage Bankers Association’s associate vice president of economic and industry forecasting, Joel Kan said that the report is consistent with other housing data showing that the housing market has substantially rebounded from Q2 of 2020. The demand for larger homes has strengthened because of the pandemic that led to more construction, home sales, and mortgage applications. He added that the permits for new single-family construction also rose to 2007 highs, potentially an indication that we might see the increase in homebuilding continue into early 2021.

Single-family authorizations in November were at a rate of 1.14 million, up 1.3% from the revised October rate of 1.12 million. Actual single-family housing completions dipped again in November, down 0.6% from October’s rate of 879,000 to 874,000.

First American’s Deputy Chief Economist Odeta Kushi said that the rise in housing starts is a welcome sign of new single-family inventory to come and that 2021 may be the year of the homebuilder.

Zillow’s Economist Matthew Speakman said today’s numbers showcase the enduring strength of the housing and homebuilding markets and that builders are overcoming the constraints that have limited activity in the last few months.

The National Association of Home Builders and Wells Fargo Housing Market Index measuring builder confidence faltered a bit this month after three months of record highs, falling four points to 86. But it’s still the fourth month in survey history the score broke 80.

Full article on housingwire.com


Builders Ramp Up Construction to Meet High Demand

26480 SW Wilken Ln West Linn, OR 97068
Presented by Kristen Kohnstamm | Offered at $5,750,000 | MLS# 20126915

From Realtor Magazine

Homebuyers continued to surge the new-home market that explains why builders increased the construction of single-family homes in August. The pace of single-family starts last month reached its highest level since February, just before the COVID-19 pandemic ignited across the U.S.

Based on the report from the Commerce Department, single-family rose by 4.1% in August to a seasonally adjusted annual rate of 1.02 million. Meanwhile, homebuilder sentiment last month rose to an all-time high as builders felt optimistic about current and future sales.

However, rising lumber costs could threaten to price more homebuyers out of the new-home market over the coming months, according to National Association of Home Builders’ Chairman Chuck Fowke and Chief Economist Robert Dietz. Low mortgage rates are helping to offset the rising costs somewhat.

Overall, housing production in August dropped 5.1% due to a double-digit decrease in the multifamily sector. Construction of apartment buildings and condos plunged 22.7% to an annual pace of 395,000 units. “Total housing starts were down in August on a decline for multifamily construction, with multifamily 5+-unit permits now down 8.3% on a year-to-date basis,” Dietz explains. “But low interest rates and solid demand are spurring single-family construction growth, which makes up the bulk of the housing market. Single-family permits continue to rise as well and are now up almost 7% on a year-to-date basis.”

Regionally, combined single-family and multifamily housing starts were highest in the Midwest, increasing 13.6% on a year-to-date basis, followed by a 5.4% increase in the South and a 3.8% increase in the West. Housing production, meanwhile, was 4.5% lower in the Northeast last month.

Full article on Realtor Magazine