Gene Harding’s construction company often has homes sitting around the Treasure Valley waiting to be finished.
No, it’s not because of lack of demand or because he ran out of money. It’s because his company, Harding Homes, simply cannot find the materials to finish projects the way they used to. And when they do get what they need, it’s more than double the cost of what Harding paid a year ago.
“Every day I go to the office I think ‘how can I figure out what we’re going to be short’,”he said. “I have houses that are sitting right now all framed out but I can’t get roof trusses on them so they’ll sit for two months because I can’t get a roof on them.”
Nationwide, home builders and other construction companies are battling record-high prices and material shortages of the likes they’ve never seen before. Lumber has been through the roof for more than a year, skilled workers are hard to find, land prices are rising and various natural disasters and shipping delays due to COVID-19 led to shortages of materials of all kinds.
This is one of several factors driving up home prices across the country, but it’s particularly acute in Idaho with its massive population influx of new residents searching for homes. And despite the boom in building, the rise in prices and unpredictable supplies of materials is eating into the profit margins of contractors and forcing them to charge even higher rates.
For example, Harding said two years ago he could build a home in Kuna between 1,800 and 2,000 square feet for $350,000. That same house now costs between $475,000 to $500,000 to build.
“I’ve been in building for the last 20 something years and I’ve never seen it like this,” he said.
Maybe money does grow on trees
Lumber is one of the biggest drivers of price increases for home builders.
Since the pandemic hit last year, lumber prices more than tripled what used to be the all-time high for the market. $600 per thousand board feet of lumber used to be a high price, but now lumber purchasers are seeing prices anywhere from $1,300 to $1,500 per thousand board feet and even more for wood panels commonly used in residential construction.
Hardened industry professionals with decades of experience, like Idaho Pacific Lumber Company’s Vice President of Purchasing and Sales Scott Sunday, are shocked.
“I’ve seen markets run because of forest fires and hurricanes and Canadian tariffs and even the spotted owl shutting down logging,” he said. “You’d think you’ve seen it all, but boy I don’t think anybody saw this one coming.”
The price hikes are a combination of multiple factors coming together at once. First, when COVID-19 first hit, it dramatically slowed production in lumber mills and other areas of the timber industry across the country due to worries about the disease and concerns it would tank the economy like the Great Recession all over again. Once production facilities got back up to speed a month and a half later, they were behind meeting demand.
And what demand there was. Home improvement box stores like Lowes and Home Depot saw record sales in 2020 as families took the money they were planning to spend on vacations and instead built decks, added additions, and made other improvements to their homes. Plus, steep demand for single-family homes in mid-size markets like Boise stretched the timber industry even further.
The National Association of Home Builders estimates the rise in lumber prices alone led to an additional $24,000 in cost to the average single-family home nationwide and another $9,000 to a multi-family building.
Mother Nature played a role too, with an intense 2020 fire season that burned enough timber in Oregon alone to build a million homes, Sunday said. The deep freeze in Texas also impacted manufacturing operations that supply glue for wood panels and other chemicals used in construction. Nails are also coming up short.
Prices hitting builders profit margins
A lot of people think sky high prices mean sky high profits, but that’s not necessarily the case.
The rapid increase in prices for materials of all kinds, plus the wait time to get ahold of items like appliances, lighting kits, or electrical wiring, means builders are having to pay more upfront than before. And sometimes, this means builders get to the end of a project before realizing all of their costs while their contracts are already set.
Building Contractors Association of Southwest Idaho Executive Officer Bill Rauer said builders are struggling to hang on to their typical 8-12% profit margin, which they use to sustain their business and keep building to meet the huge demand. He called the market conditions “a perfect storm” of unprecedented price increases.
“The average builder is doing a higher volume, but they’re not making more money per house,” he said. “In many cases they’re making less money per house because of the increasing prices on their end of the deal. And on the realtors side, even though there’s the higher demand, there’s less inventory so there are less houses being sold.”
Harding, whose company builds between 50 and 60 homes a year in the Treasure Valley, said he tries to build homes affordable to an average family, but with the materials as difficult to get as they are, it’s getting more expensive for his company to try and cut into his profit margin to keep prices down on some units.
“My profits have gone down, not up,” he said. “I have a bunch of people on Facebook saying ‘oh man (builders are) making all of this money’, but nobody’s making the money they used to.”
A housing shortage? In this economy?
It’s not just Boise where finding a house to buy is more than half the battle.
There’s a growing housing shortage across the country, which goes all the way back to the Great Recession. After years of overbuilding and speculating on Wall Street, the subprime mortgage industry collapsed in 2008 and it sent the nation’s economy into a yearslong tailspin many parts of the country never fully climbed out of.
One of the impacts of the crash was that most residential construction projects ground to a halt. The number of housing units under construction per year dropped from over two million down below a million nationwide. And as a result, Sunday said the logging industry slowed down with it, and it led to loggers leaving the industry, mills closing and truckers finding other jobs.
This means it’s harder for the timber industry to keep up with the pent up demand we’re seeing now.
“It really impacted the ability of the industry to keep up,” he said. “Housing starts had dropped so hard that adjustment was needed and that adjustment was needed because we didn’t need as much lumber and as much panels at the time.”
Since then, Sunday said the number of homes being built slowly climbed up and the lumber production capacity climbed with it until the market reached healthy levels in 2019. By the time the beginning of 2020 rolled around, there was so much home building going on that the demand was outpacing the supply, starting a spike in prices. And then, COVID-19 hit and shocked the system leading to the sky-high rates we see now.
And while home building slowed to a crawl for a few years a decade ago, the American population kept growing and the mid-size cities like Boise started to boom. This leaves us with not enough homes, or the materials to build them, for everyone who wants one to buy at a reasonable price.
Labor took a hit too
Materials aren’t all builders are struggling to find.
The boom and bust of the last decade in American construction led to instability in the labor market, driving out many construction workers. Rauer said builders are having to pay higher wages than ever to keep skilled workers on their projects in all positions, from framers and electricians all the way up to management.
After the Great Recession, a lot of people left the industry after layoffs and difficulty finding work in the years after the crash. They found new skills in other adjacent industries and haven’t looked back.
“After the last recession there were a lot of people who walked away from the industry because they got tired of riding the cycles,” he said. “A lot of the experienced people haven’t returned.”
Now, Harding said companies have to compete harder to keep workers on the job-site. He said a local heating and air conditioning company he used to work with regularly had an entire crew quit because their request for better wages wasn’t granted.
Plus, he said the gap in between building booms means an entire generation of kids missed out on learning skilled trades and heading into home building as a career. Now, there’s no homes and no workers who came into the field from that time on top of the retirements of the older generation of tradesmen who stuck around.
“If you came to me and said ‘I want a house, but I want it built in 2009 I can’t give it to you because those houses don’t exist’,” Harding said. “Now we’re trying to pick up a shortage because most of the kids aren’t in a job frame of mind looking to enter the trades.”