High Wood Price Shouldn’t Scare New Home Buyers

You may have seen the headlines: “Timber Prices Are at an All-Time High,” “Home Costs Soar as Timber Prices Soar.” While it’s true, lumber prices rose 208 percent in 2020, it’s not the big barrier to buying a home that homeowners pretend it is.

Fluctuations in timber prices

Timber prices have gone up and down before, rising in 2017 and 2018, and then falling again in 2019. Then the “perfect storm” of 2020 hit both demand and supply issues, says Robert Dietz, chief economist at the National Association of Home Builders. (NAHB).

“We predicted a growth rate of about 4 percent in single-family home construction in 2020, but it increased 12 percent,” Dietz says. “Demand for wood skyrocketed along with demand for new single-family homes and an increase in remodeling projects. We also saw the shift to people wanting bigger homes, which meant demand was even higher.

“The pandemic caused the disruption of global supply for everything, including the literal basics of housing construction,” says Dietz.

However, there is also an insufficient domestic supply of wood, he says. Steel mills cut production when the pandemic and economic shutdown hit, anticipating a long recession rather than a rapid increase in demand. Even with high demand, many sawmills continue to operate with fewer workers due to COVID-19 safety requirements.

But homebuyers don’t need to consider reselling instead of new ones. Home builders are addressing problems in a number of ways. And even when the initial cost of a newbuild home is higher than buying an existing one, you still can’t exceed the long-term cost savings of a newbuild home.

How do builders handle high wood prices?

About 90 percent of single-family homes have wooden frames, Dietz says.

A recent survey of NAHB builders found that they are taking several approaches to raising timber prices. About half (47 percent) of builders are including escalation clauses in sales contracts that would cover increased costs due to timber prices. About a third (29 percent) pre-order wood when prices fall to avoid buying it when prices rise.

Other builders choose to delay construction or sales when lumber prices rise, or pause construction after framing to expect lower prices.

“The hope is that by 2022, some of the supply-side issues will be solved with more sawmill capacity in the U.S. and a new deal with Canada (from which the U.S. gets about a third of its lumber),” says Dietz. “Future markets anticipate that timber prices will remain high until 2021.”

But in the meantime, builders are seizing the opportunity to explore new options.

“High wood prices offer an opportunity in the coming years for builders to build differently and experiment with things like 3D printing, which so far is only effective for single-level homes,” says Dietz.

The Cost Advantages of Newly Built Homes

Affordability is often a major concern for homebuyers. In recent years, low mortgage rates have kept homes in the affordable range for families, including first-time buyers, despite rising prices.

First-time buyers are often looking for affordable homes, so they tend to buy existing homes. However, the price difference between new and existing homes has narrowed, so the purchase costs are practically the same. In March 2021, the median sale price of a newly built home and that of an existing home differed by less than $2,000, according to data from the Census Bureau and the National Association of Realtors.

Despite the increase in the cost of materials, lots and labor, the price point and appreciation of the benefits of newly built homes attracted more first-time buyers to the new home market in 2020. Plus, Dietz says, millennials, who do occupy most of the first-time buyer’s market, are more willing to buy a home on a smaller lot or townhome. Both options usually reduce the cost of the house.

New home owners enjoy several advantages over resale homes. There’s peace of mind knowing that no one has ever lived in the home (a point that appeals to safety-conscious buyers in the midst of a pandemic). There’s also the joy of designing exactly the house you want, rather than making trade-offs for existing homes that are¬†nearly¬†perfect.

But perhaps the main reason for the growing demand for new homes is that they are less expensive to maintain than existing ones.

For example, home buyers are advised to set aside at least 1 percent of a resale home’s value annually for repairs and maintenance; For example, $3300 in a $330,000 home. Newly built homes rarely require extensive repairs or maintenance in the early years. Builders typically include one- to two-year warranties on many systems, materials, and devices, along with a 10-year warranty on structural problems. Unlike an existing home, any problems found on a home inspection are the responsibility of the builder.

New homes are also built to the highest standards of energy efficiency and water conservation, meaning your utility bills are likely to be lower than they would be in a similarly sized resale home. Finally, if you eventually decide to sell your home, its resale value should be higher because you will list a 10-year-old property instead of one that is 20 or 30 years old.

So, while higher wood prices have an impact on new home construction, the long-term value of newly built homes can offset any short-term price increases.

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By Catharine Bwana