Surging construction costs, supply chain issues resulting in notable shortages of essential building supplies and lack of skilled labor have collectively played a significant role in the lagging number of new construction starts over the past year. Even in the most active U.S. housing markets, the number of new homes being built has taken a nosedive as homebuilders are reluctant to assume the escalating cost and risk profile associated with these projects. This has had a subsequent effect on many would-be homebuyers that have already been struggling to navigate record-low inventory levels and the astronomic home price spike. Many of these individuals have been priced out of their dreams of owning a home—turning instead to rental properties. This presents an excellent opportunity for savvy real estate investors to cater to the needs of the increasing number of tenants looking for affordable and flexible housing options.
There is a couple of ingredients that drive inflation’s role in the home price spike. COVID-19 set the stage for increased expenses and an overall lack of building supplies has translated into home price spikes. Factories were brought to a standstill thanks to lockdown and social distancing protocol and are now frantically attempting to make up for the months of sub-par production. However, the demand for these much-needed materials is only increasing in part due to an uptick in renovations and the need for new builds to replenish inventories nationwide, making that task increasingly more challenging. What materials are available to builders carry a hefty price tag. While the price of lumber has dropped from an all-time high of $1,670 per thousand board feet last May to $634, that still represents a ten percent bump over the past year. Other needed supplies are getting more expensive as well. On average, the aggregated price of windows, roofing tiles, doors and steel jumped 22% since 2021 based on data reported by the Labor Department of the National Association of Home Builders. Before the onset of the pandemic, prices for these commodities rarely fluctuated by 1% year-to-year.
Unfortunately, experts anticipate that the elevated cost of building new homes will continue for the foreseeable future, which could prove costly for builders and homebuyers alike. Typically, contracts for newly built homes provide for an allowance to cover any unanticipated construction expenses. That means that developers will be forced to pass on the increasing costs of breaking ground to the buyer. Based on a report from the National Association of Realtors (NAR), the overall housing inventory has dropped by 20.6% over the past year, with properties lasting on average only 17 days before being sold. That spells a tight market for aspiring homebuyers in the coming years—with Harvard’s Joint Center for Housing Studies (JCHS) stating in their 2021 year-end report: “The supply of existing homes for sale has never been tighter and is at its lowest level since 1982.”
The collective rise in home prices is not solely attributable to building supplies. The JCHS highlighted a number of additional issues fueling the ongoing price crunch, including restrictive local policies (e.g., single-family zoning, minimum lot sizes, parking requirements, etc.). Even in big cities where employment opportunities are increasing significantly, there is a disproportionately low number of houses being added to the market to accommodate the influx of new workers. NAR statistics indicate that from 2010 to 2018, employment rose 22% while the housing stock increased a meager four percent. Similarly, jobs in San Francisco spiked 30% in the same timeframe while the local governments only approved 7% more housing permits. The urban areas’ anti-development regulations are pushing housing development increasingly further out into the suburbs, leading to increased commutes and increased negative environmental impact.
As an increasing segment of the population turns to rental properties due to the rising cost of homeownership, real estate investors should have little problem finding suitable tenants. What’s more, even at the peak of pandemic, landlords still collected between 93% to 96% of rental payments from tenants every month per the National Multifamily Housing Council’s (NMHC) rent payment tracker. This indicates that multi-family and single-family residential investment assets are impressively resilient to external factors and provide reliable returns. And as workers return to the office, many major metro markets that were underperforming during the lockdown are undergoing a resurgence—providing further options for investors to diversify their portfolios. NMHC data backs up the revival of the urban rental marketplace, indicating that between New York, Los Angeles and Boston, tenants absorbed over 110,000 units over the initial three quarters of 2021.
The real estate market is a dynamic and fast-paced industry. Accordingly, investors require flexibility and experienced insight to successfully garner consistent returns. That’s exactly what Gauntlet Funding has to offer. Our New York-based team of financial professionals specialize in delivering individually-tailored funding solutions for all types of investment projects—all in a fraction of the time and hassle associated with obtaining a traditional mortgage through a bank. Contact us today to learn more about how we can assist you in identifying lucrative market opportunities and growing your investment portfolio!
Inflation’s Role in the Home Price Spike | Gauntlet Funding – Melville, NY