The surge in lumber prices has led to a direct surge in new home prices, with mortgage rates remaining relatively low. The closure of sawmills due to the COVID-19 pandemic directly led to an interference of lumber supply. About 40% drop has been experienced in home sales since the onset of the pandemic.
With the pandemic lasting well over a year; individuals are now exploring owning their first homes away from the cities. The inventory on homes has very few listings as there are not enough new homes for sale in the market. On the other hand, mortgage rates are lower than 3%. With a rise in consumer spending, the economy is now well under recovery. An improving economy in addition to reduced mortgage rates is a perfect combination for a surge in home sales.
Effects of Mortgage Rates on New Home Sales
Considering the current low mortgage rates, the following are the effects of low mortgage rates on new home sales:
- High buying rate. While a lesser portion of your salary goes towards interest, a low rate ensures a drop in the amount of money paid to borrow the mortgage. Consequently boosts customers’ buying power. Low mortgage rates mean more chances for consumers in the market compared to higher rates.
- Increased demand for new homes. Homebuyers are in a better place to own houses with the 3% rates on mortgages. The rates serve as the best news over a decade now despite their introduction during the new home sales surge. As the demand for new homes grows, available houses are few. There is an anticipated increase in demand for house sales since the announcement of rates.
- Changes in the mortgage rates impact new home sales more than existing home sales. For instance, in 2018, mortgage rates rose to 5% from 4.75% and generated a supply spike. The rates reduced sales in that year. The current demand for new houses now is better than in the years between 2008 and 2019.
- Builder confidence develops by the low mortgage rates; these rates have become essential as lumber prices shoot to the roof. The monthly supply range is another way to study new home sales prices and determines the builder’s confidence. Therefore, 4.3 months and below monthly supply increases builders’ confidence. In 2018, it was below 4.3 months.
In view of the surge in lumber prices, the supply of lumber in the US is consistently affected by the following factors.
- Shortage of trees. Most logs are retrieved from the Canadian forest. With all focus on one area, trees are getting scarce over time reducing the number of those available for lumber.
- Low lumber prices for a while. A consistent low price of lumber in addition to a mediocre housing market for several years now led to a permanent shut down of sawmills.
- Government restriction. The pace at which logging was done in the Canadian forest was unsustainable, so the government reduced the allowable cut.
- High demand on lumber. Big house builders, especially the single housing units, demand huge lumber supplies. Their demand has made lumber supply scarce to other builders.
Lumber Prices on New Home Sales
The onset of the pandemic coupled with a slump in housing led to a shortage of lumber as the sawmills shut down. Here are some comparisons on how lumber sales has affected housing:
- There are not enough materials for house construction. Subsequently, lumber prices have risen; the construction industry is looking to have new home prices hiked.
- Home construction rate reduced in the mid-2000s due to high numbers of new housing. Most sawmills ran out of business as the housing industry had few sawmills to supply lumber.
- High demand for housing has caused a need for housing renovations and expansion. Lumber needed in large numbers for renovations has resulted in scarcity in supply causing a surge in prices. Ultimately, there is a delay in house construction and repairs reducing the number of ready houses in the market.
- Despite the prices, there is a rising demand for homeownership. For instance, random lumber varieties have gained a record of $1615 recently. The gain is sevenfold compared to the prices in April. Lumber is the most considerable product house builders’ use; such demands are weighty for constructors. According to the chief executive officer of Homes by Dickerson, the situation at hand is new. The businessman intends to build more houses to reduce the surge but can’t find the materials to use.
- While some wood types for specific constructions are scarce, independent builders have a headache. Some constructors are reporting cases of stolen lumber and other raw materials in their building sites.
- High tariffs on lumber. The former US President, Donald Trump, increased custom duty on Canada’s lumber supply to 24%. High custom duties have limited the sale of lumber in the US as the business is not lucrative anymore.
- The presence of COVID-19 struck lumber supply immensely and resulted in limited availability in sawmills. Decreased availability meant increased lumber prices and a reduction in new home construction for sale.
A rise in material cost for construction cripples the home-building business. Regardless, investors expect quality returns from the current house sales despite projects with huge expenses usually having lower revenue. However, without government intervention on the current lumber prices, most builders will eventually lose their profits after factoring in the labor costs that go into selling a home.