*Click the play button to listen to Rocky explain how material and labor shortages are affecting new home prices.
If you’re considering building a new home in the Morgantown WV area or anywhere in the U.S., there are a few things you should know about the current landscape of the residential home construction industry. I know…it feels like your brain doesn’t have room for any more information right now, but if you’re thinking about building, this article could save you tens of thousands of dollars.
We’ve been building custom homes since 1995, and these are the craziest times we’ve ever seen in the homebuilding industry. It’s a perfect storm of high demand, low supply, and materials and labor shortages that is causing the costs of building new houses and other properties to rise significantly. This in turn is making the price tag of your new home go up.
In the following paragraphs, I’m going to explain why costs are going up and how you as a homebuyer can protect yourself from getting hit with the surprise of a much higher price for your new home.
Construction costs are generally based on the costs of materials + labor, and those costs are determined by supply vs. demand. There are other variables involved, but for simplicity’s sake let’s just stick with these two main factors.
High Demand / Low Inventory For New Homes.
First and foremost, there’s a really high demand for new homes construction right now. Some of the reasons for that is there is an incredibly low inventory of new construction homes and existing homes, so that tends to drive the demand up. This also tends to drive prices up, as we all know. Why is there low inventory? One of the main reasons is the super-low mortgage rates.
Mortgage interest rates have been dropping to record lows, making it a prime opportunity for many folks to finally buy or build the home of their dreams. Currently, many people are receiving mortgage rates under 3% for a 30 year fixed, and a 15 year fixed rate recently was under 2.5%. This means that the cost of money itself is very low, allowing home buyers to get more “bang for their buck,” and enticing them into buying quickly in order to lock in their rates.
Shortage of Materials & Labor.
While demand for new homes is going up, supply is dropping. This is due to a lack of materials and labor.
COVID-19, as you probably know, shut down many manufacturing plants and businesses. The building industry was labeled “essential” early on and construction companies continued to build and move forward with their projects. However, many of the mills and factories that produce building materials were not able to keep producing materials, so builders were using up all the inventory of supplies.
This created a shortage of supplies, but there has also been a shortage of labor. The unemployment situation allowed many workers to choose to stay home, whether it was in fear of COVID or frankly because they could make the same (or more) money staying home then they could going to work. So a lot of the manufacturing plants and factories are not back to their full workforce and cannot keep up with production demands.
Natural (and Unnatural) Disasters all around.
In addition to economic stressors, the environment is playing a big part in this shortage. There are wildfires currently burning in the west, causing more problems with the availability of materials. There have been a series of hurricanes in the south, which have caused more demand for new construction, remodels and rebuilds—thus using up available building materials and causing a lot of stress on the supply and demand for materials. One of the recent hurricanes affected several mills producing softwoods within the path. When those mills are damaged or shut down, their production once again will be limited and the availability of materials will become more scarce.
In the north, the Canadian lumber tariffs are exceptionally high right now, and we need Canadian lumber to keep up with construction demands in the United States. The lead times for shingles, siding, windows and other materials have also increased tremendously for builders…if we can even get them at all.
One of my major suppliers recently sent us some information that showed us graphs of framing lumber and the materials needed for them to sell to us to build houses. And since May 1st those prices have gone up by over 100%:
This is simply due to the short supply and increased demand for their products, in part due to the causes outlined above.
What can you do as a buyer?
So how does all this affect the final cost to build a new home? Very simply, more expensive materials make for a more expensive home.
This is why it’s so important for folks that are thinking about building to make sure you’re working with a builder that understands what’s going on right now, because it will affect the bottom line for how much your new house will cost.
At Vision Homes, we don’t think it’s fair to just build a house and at the end tell people how much more they owe. The customer deserves full transparency and the ability to choose how to proceed moving forward. Here are just a few options we’ve been offering our customers:
- Option 1: Press Pause. The option of pausing construction and waiting this out to see if the cost to build goes down should be available to you as a home buyer, and you should understand that if you choose to continue what the increased costs will be. We work hard to be very transparent to the customer, and to show them exactly where the price increases. We’re there to help you make an informed choice about the best way to proceed based on your unique situation.
- Option 2: Escalation Allowance. Another option we offer is to add a percentage that the builder and the customer agree on—say, 3 or 4%— to the price of the house as an escalation allowance. That means if you have a $250,000 home and we agree on a 3% escalation clause, $7,500 may be added to the purchase price of your home to be used exclusively for the increased cost of materials that are needed for the build. A good builder can track today’s materials prices vs. what it was when they originally ordered. If it’s less than the agreed-upon allowance, the customer can pocket the money and use it for something else. If it’s more than the allowance, the builder can pass the cost onto the owner. It’s not a perfect solution, but at least you have a roadmap for managing costs.
Regardless of what you as a home buyer choose, you should feel comfortable knowing that your builder is transparent, has a plan, and has the resources to get the job done.
Conclusion
While costs are on the rise due to materials and labor shortages, we’ve found that the rock-bottom mortgage interest rates can counterbalance some—if not all—of the increased construction costs. It’s still an excellent time to build a new house in Morgantown and the surrounding areas, but if you’re planning to build it’s vital that you pick a builder that:
- Has a plan,
- Has proven systems in place,
- Understands what’s going on in the market,
- Has relationships and partnerships with their major suppliers,
- Has crews and labor that are loyal to them and available to them,
- Is transparent and can present options and help you to make an informed decision.
Select a builder that will work with you and give you those choices and help you make the right decision for you. And then if you choose to do it, building your home can still be a fun, enjoyable experience for you and your family.
If you’d like to learn more about your options, contact us to set up a time to chat!