Will New Housing Starts Solve the Housing Shortage?
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Will New Housing Starts Solve the Housing Shortage?

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Dave Meyer Read More

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Housing inventory remains near record lows: According to NAR, the months of supply for existing home sales are down 36%, from 3.3 months to 2.1 months.

With existing home inventory so low, many are hoping that new construction can come to the rescue. If people aren’t selling homes, at least new homes will come on the market and increase inventory, right? And with more inventory, the crazy price appreciation we’re seeing will slow, right?

If only it were that simple.

Housing starts begin to recover

The good news is that new housing starts have recovered to pre-pandemic levels, despite a brief step backward in March.

fred data

This is good news for long-term inventory growth, but unfortunately, it’s not going to help in the near term.

It takes about eight months to build a new home, according to the U.S. Census Bureau. Meaning that the housing coming onto the market right now was started back in the fall of 2020 when housing starts were lower than what we saw pre-pandemic.

It was not until December that new housing starts reached where we were in January and February of 2020. The bigger surge in supply from new construction probably won’t hit the market until after the summer.

Will the new inventory help?

Then there are the questions of how much these houses will cost and whether the new inventory will actually help cool the market.

I don’t think so.

lumber prices 1

The lumber problem

Lumber prices are insane right now. I don’t claim to be an expert on lumber prices, but from what I gather, there are two primary problems.

First, lumber producers shut down production at the beginning of the pandemic, expecting a long lapse in demand for new homes. Oh, how wrong they were.

There was a brief slowdown in the market in spring 2020, but we all know what’s happened since then. The housing market has gone sky-high. This frenzy incentivizes builders to build, which raises demand for lumber.

Demand is going up while supply is low. A perfect recipe for rapid price growth.

It also appears that there is a labor shortage in the lumber industry, so producers are not able to catch up to meet demand as quickly as they would in a healthy market.

According to CNBC, the increased cost of lumber is adding, on average, around $36,000 to the price of new homes.

While we should see some more new construction inventory hit the market in 2021, it’s unlikely to cool the price appreciation we’re seeing right now. Instead, it could add to it, as home builders pass on their additional material costs to buyers.

What this means

This all confirms my hypothesis that the red-hot housing market is not going to slow down until the fall. I think we’re going to continue to see a very hot, competitive market at least through the typical busy season of June through August.

After the summer, the market will likely slow down to a more normal level. It’s unclear if lumber prices will come back down to earth a bit by then, but we should expect inventory to rise 10-20%, which should have a cooling effect.

We need the housing market to cool off. Sure, if you own a bunch of properties, you’re seeing great appreciation right now. But activity and appreciation levels like this make it difficult for new investors to enter the market and for active investors to grow their portfolios, and will just further exacerbate the housing affordability issues we have in the U.S.

Let’s all hope that inventory recovers soon.