Lumber, labor costs driving up new home prices

·9 min read

May 22—Barely a week ago, Tom and Pam Volk moved into their new house in Sylvania and were forced to accept a temporary resident in the kitchen — a "replacement" refrigerator they had to buy because what they ordered had been delayed.

"You can almost laugh, but who knows how long until I have the real refrigerator," Mr. Volk said about the black upscale KitchenAid refrigerator the couple ordered in October and the $700 understudy that will be relegated to the basement whenever the preferred appliance arrives.

"In the scheme of life it's not a huge problem, but it is annoying and it does seem like a stupid one to have," Mr. Volk said. "I did not want a second refrigerator, but that's what we had to do."

Those thinking about building their dream home right now probably have heard that lumber prices have soared nearly 200 percent since November, adding nearly $60,000 to the price of a new home.

But while lumber is the largest component of a new house, it is not the only component. And for various reasons, prices of just about every other component — including labor — are rising significantly.

Even if a component hasn't increased dramatically, availability has become an issue as the Volks discovered.

"It's all due to a perfect storm of an unfortunate relationship of poor circumstances," said David Logan, senior economist at the National Association of Home Builders in Washington.

"As with everything else over the past year and a half, the woes in the supply chain, increased prices, and shortages can be traced back to the start of the pandemic and the government policy responses to it," Mr. Logan said.

The top materials or product issues that NAHB-member builders repeatedly cite as soaring in price are lumber, oriented strand board (known as OSB), appliances, doors, and windows.

Many builders also are seeing significant price increases or having difficulty getting roofing shingles, flooring, garage doors, concrete, and steel.

"I suspect there's some profiteering going on. The flooring laminate we ordered last year is up 25 percent for the same stuff. Now we're being told there's a landscaping shortage," Mr. Volk said. "I had to laugh when I was told that. I said, 'Really?'"

Toledo-area custom homebuilder Jim Moline, owner of James E. Moline Builders, wishes he could laugh. But he finds nothing funny about the situation.

"It's still a good time to build because of interest rates being so low. But lumber prices are just stupid," said Mr. Moline, who built the new house for the Volks.

"I built a house two years ago and I paid $27,000 for the lumber package. Today I paid $89,000 for the same lumber package," he added. "And it's not like we're getting better lumber. It's Grade B-, not A+. It's still the same lumber."

Like most other builders nationwide, Mr. Moline has had to place "escalator" clauses in clients' building contracts that states that the buyer has to cover lumber price increases.

"The thing is, it can take up to 30 days until closing, and lumber yards now will only hold prices for seven days," Mr. Moline said — which means a price he quotes today could be 30 percent higher in a month.

"People have been pretty understanding about this. But it's just been frustrating that we order the stuff and it's 4 1/2 months later and we still don't have it," Mr. Moline said.

Builder Mike White, of Buckeye Real Estate Group, said that besides the other products that are increasing, he's paying higher prices or having difficulty obtaining siding, electrical wire, PVC plastic products, and flooring. Mr. White is constructing several houses in his Summerfield subdivision in Perrysburg.

Also, labor costs are rising, he added.

"It changes daily. I build many speculative homes, which I am currently not pricing until I am ready to ship the lumber and I know that my lumber prices are locked," Mr. White said before noting the lumber for a house for which he had an estimated bid in March has since risen 32 percent.

"It's definitely causing issues, but I'm on track to build more than last year. There's still purchasers out there because the monthly payment differential is not that large even though the housing price is $70,000 more than a year ago," he said.

Also, because of the low inventory and high demand for existing houses in the Toledo market, those who are selling a home before moving to a new house are making a substantial profit on their existing home.

Builder Mike Hojnacki, of Hoj Development, experienced that demand first-hand when a real-estate agent showed up at his home earlier this year and asked if he'd be willing to sell it.

She told him she had buyers waiting and he got two offers right away. "We got $30,000 over our asking price and it was an all-cash offer," he said.

As for Mr. Hojnacki's homebuilding business, it continues to be a case of hurry-up-and-wait.

"Roofing shingles and doors are all up, but it's not just that the price of them is up, but the lead time is huge — 12 weeks for a window," he said.

Like other builders, Mr. Hojnacki has had difficulty getting subcontractors when he needs them, and for those that are available, the hourly rate has gone up.

"Labor was about $11,000 [component of a home] in October, but now it's about $16,000 for labor. Guys are so busy they're marking up their prices," he said.

And with some buyers balking at the volatile lumber prices, Mr. Hojnacki has begun to experiment with insulated concrete forms, a mix of rebar and concrete for use as walls rather than a wood frame.

"They used to be way overpriced to do, but now they are in line with lumber. It does give you more insulation but it can cause more of a moisture possibility if you don't have the correct heating and insulation," he said.

Mr. Logan, the NAHB economist, said that while prices for building materials and components are up across the board, there is no single reason behind it all.

Lumber mills cut back on production when the pandemic hit and caused state lockdowns, and mill owners have not yet caught up with demand, he said.

The unexpected freeze and snowstorms in Texas this year caused a major disruption in the supply chain for PVC plastics and other petroleum-based products like roofing shingles.

Production of appliances has been slowed by a shortage of microchips caused by a shutdown of factories in Asia and high demand for chips by automakers.

And products like steel, aluminum, imported lumber, and gypsum products have been hurt by trade-war tariffs and transportation supply chain disruptions.

Toledo-based Owens Corning, a leading supplier of shingles and other building materials, is among those manufacturers feeling the effects of the supply chain disruptions.

"We're in an inflationary environment across building materials industries overall, including roofing products. Our input materials, and our transportation costs are all feeling that inflation, which flows through the cost to manufacture and deliver products," spokesman Matt Schroder said.

"We're aware that a lot of home improvement contractors, including many contractors in our independent network, are adding financing options to help their homeowner customers through the process," he added.

Mr. Logan said builders are being creative in other ways, such as providing temporary appliances to finish a home until the desired products arrive — as the Volks are experiencing.

"I heard of a Florida project where [the builders] were paying through the nose to get garage doors, so they were adding them until the day of a home's closing," Mr. Logan said.

To keep the original quoted price, some builders are suggesting that homes' square footage be reduced or that some of the fancier finishing touches be downgraded, he added.

'Buyers can kind of compromise on their ideal build in order to keep things on budget. Unfortunately we're hearing more and more that contracts are being canceled because costs are becoming so prohibitive," the economist said. "That began to show up in the latest macro data in [building] starts from the U.S. census."

According to the Census Bureau's May 18 report, single-family housing starts in April were 1.09 million, or 13.4 percent below the revised March figure of 1.26 million.

"In that same release there is a table that shows housing units that are authorized but not started. If you go back five months you see that that number is increasing, increasing, and increasing," Mr. Logan said.

"That suggests people are holding off. That is primarily, if not entirely, due to increased material costs," he added.

Still, the new housing industry is not in crisis for several reasons, Mr. Logan said. There's pent-up demand for new homes, existing housing inventory is significantly low, and people have lots of money to spend after canceling big purchases in 2020.

"Demand was going to be there. And now we have record low interest rates and government stimulus money for people to use. ... Demand is so strong that many builders can't keep up," the economist said.

But "supply chain whiplash," as Mr. Logan likes to call it, will start having an effect on demand if it continues to be prevalent.

"Cliche as it may be, the best analogy right now would be the construction industry is now seeing how bad the butterfly effect can be. One storm in Texas can affect the price of PVC pipe in New York," he said.

Also, not all countries where building products manufacturers are located were shut down or disrupted simultaneously. "The time table was rolling. One month it was one country, one month another country. First Mexico had a long lockdown, now it's India," Mr. Long said.

"In my mind, that rolling effect is the primary driver of the 'material-du-jour price increases' that we've seen over the past few months," he added.