Material Shortages and Higher Costs Have Slowed Down New Home Sales in 2021
New home sales took an unexpected hit in the month of February in spite of increasing demand for single-family homes, dropping 18.2% from January’s numbers. Nevertheless, industry experts say they aren’t concerned about the housing market’s long-term fundamentals and have attributed this dip in sales to short-term factors such as rising lumber costs and material shortages. In this article, we’ll take a detailed look at the factors that have attributed to this recent drop in new home sales as well as discuss the housing market’s outlook for 2021.
High Demand, Limited Supply
After taking a look at February’s drop in new houses being built, one might assume that demand for new housing has taken a dip as well. However, housing starts are still up 30% year over year – and while February’s housing starts did drop 10.3% from their January total, demand for new housing is still high.
By and large, the factors causing new home sales to slow have much more to do with limited supply than slowing demand. In 2020, many mills were forced to either slow or halt production in order to comply with the new regulations and guidelines that were put in place due to the COVID-19 pandemic. At the same time, mill operators and lumber companies alike both drastically misread the market in 2020 and failed to predict the unexpected housing market boom that began last year. As this housing market boom has continued into 2021, mills and lumber suppliers have struggled to keep up with demand, leading to material shortages and skyrocketing costs.
In February, softwood lumber prices reached a point that was 110% higher than their highest point in February of 2020. These higher lumber prices have added a total of $16,000 in extra cost to the average price of a newly built home and have undoubtedly encouraged many would-be homeowners to hold off on their plans to build a new house. At the same time, though, even builders who have found clients who are willing to bear these higher costs are still struggling to procure the materials they need, and many builders whose services were still in high-demand last month weren’t able to meet that demand due to material shortages.
The Housing Market’s Outlook in 2021
While the issues of soaring lumber prices and limited supply are certainly troublesome for many builders and home buyers alike, the outlook for the housing market going forward is still optimistic. It’s worth noting that in spite of the substantial dip in new home sales that we saw in February, the February 2021 numbers were still 8.2% higher than they were in February 2020 – an impressive figure considering the fact that the economic effects of the coronavirus pandemic had barely begun to make an impact in February of 2020.
While sales have indeed slowed more than expected so far this year, the materials shortages and high lumber costs driving this dip in sales are considered to be short-term issues that will largely resolve themselves in the coming months as suppliers ramp up production in order to meet demand. Realtors are also optimistic that the continued rollout of the COVID-19 vaccine will ease some of the seller apprehensions regarding the coronavirus and further improve supply. Demand for new homes is expected to continue growing throughout 2021 as well, thanks in large part to the fact that the millennial generation is just now entering its prime home-buying years; according to the National Association of REALTOR’s Home Buyers and Sellers Generational Trends Report, millennials now make up 38% of the nation’s home-buying population and are expected to continue driving demand for new homes throughout the near future.
All of this is to say that February’s drop in new home sales does not seem to be any reason for long-term concern, and the housing market’s fundamentals remain as strong as ever. While the high cost and low availability of lumber is certainly an issue for builders who have seen their operations slowed in spite of record-high demand, it shouldn’t take long for production to catch up. As the world slowly returns to some sense of normalcy and suppliers work overtime to make up for their missed projections, builders should soon be able to enjoy a market where supplies are readily available and the demand for their services is high.