Construction Update – June 2021
To Build, or Not to Build, that is the question!
A scarcity of single-family home inventory combined with record low interest rates, have led to an unprecedented housing boom and surging home prices. It is a sellers-market to be sure. The millennial generation is growing up and ready to leave apartment life. In addition, the emergence of the work-from-home trend has many looking for more economical space in their homes and the desire to leave city life. Of course, the big driver in all of this activity is the low interest rate environment.
Surging lumber prices, (up as much as 400% since January 2020), supply chain issues, and labor shortages lead many in the industry to believe that home prices will not be falling in the near future. While lumber futures have started to trend down, forecasters expect lumber prices to remain elevated through 2022.
So, what does all of this mean for our potential customers? Do you go forward with plans to build a new home, despite the higher prices? Or do you wait to build your new home, expecting prices to drop to pre-pandemic levels? What about interest rates? As of the writing of this article, 30-year mortgage rates (for a credit score of 680-699) are at 2.5%. Just 2 short years ago 30-year mortgage rates were at 4% – and we thought that was low! While the price of our product has increased for all of the reasons noted above, the effect on monthly mortgage payments has been minimal due to these very low interest rates. For example, an increase of $35,000 to the base price of one of our houses, equates to an extra $139 in your monthly mortgage costs ($35,000 @2.5% over 30 years).
With no foreseeable drop in housing prices, there is talk that mortgage rates could rise to combat inflation. While higher rates may lead to less demand and therefore more stable housing prices, it could also mean higher mortgage payments for our customers.
What are you betting on in the housing market?
Below are a few scenarios to consider when you are trying to decide when to build and just what you can afford. It also shows you the power of a low interest rate environment. Note that the Loan Amount for Scenario 1 is $260,000 (to reflect current pricing), while the Loan Amount for Scenario 2 fluctuates between $225,000 (to reflect pre-pandemic pricing) and $250,000 (assumes a slight drop in pricing over time). In the final example, the Loan Amount is the same for both Scenarios – $260,000, as it assumes that home prices do not fall.