The Independent Investor: Sticker Shock in Housing Market

The housing market has been in the doldrums so long that most of us believe that when we are ready to buy a new home there will be plenty of deals out there. Think again, the rising costs of everything from land to labor are causing new home prices to climb.

As U.S. residential real estate begins to rebound from its worst downturn since the Great Depression, the pace of recovery is beginning to cause bottlenecks in all sorts of areas. Suppliers of various building materials, for example, after shutting down much of their operations over the last few years, suddenly are besieged with orders from homebuilders across the nation. Unfortunately, it will take time, money and a willingness to expand in order to meet this new demand.

In the meantime, prices go up. Here are just a few examples: the price of gypsum (a key ingredient in drywall) is now only 6 percent below its peak price during the housing boom of 2006. Cement is 99 percent of its 2006 peak price while lumber is 93 percent of peak pricing. Those producers and distributors who have materials for sale are benefiting from these higher prices, but don't expect them to willy-nilly start expanding capacity.

Once burned, company managements are going to make sure that this new-found demand is not simply a flash in the pan. They will wait until they are sure that future demand and higher prices are sustainable over the longer turn before reopening closed plants and hiring more workers — if they can find them.

It may be hard to believe, given the nation's unemployment rate, but skilled labor is increasingly difficult to locate in both the construction industry and the sectors that supply materials. During the great housing layoff, carpenters, bricklayers, frame builders, equipment operators, electricians, plumbers and more were forced to abandon their professions and for many their geographic location in order to feed themselves and their families. Many migrated into the energy business or wherever else they could find work.

Although we don't like to admit it, Mexican workers (illegally here or otherwise) are also scarce. Many of them went back to Mexico during the recession and never returned. Others abandoned states like Arizona after lawmakers passed stricter immigration laws aimed at undocumented workers.

Even land in the form of finished lots is a scarce commodity. During the last five years, the pipeline of approved finished lots was drawn down nationwide and few new projects were initiated. It will take longer than you think before that pipeline is refilled. Remember that developers must go through a long and onerous process to prepare land for new construction. Some state and local governments require years of deliberation before approving residential projects. In the meantime, finished lots are going up in price.

Homebuilders are between a rock and a hard place. Costs are increasing. They can do one of two things: eat the costs, thereby reducing their profits, or pass them on to consumers in the form of higher sticker prices. Obviously, they would prefer the latter, but that remains somewhat difficult because of the comparatively few potential homebuyers who can qualify for a mortgage.

If builders raise prices too much, the buyers will balk and look elsewhere, namely in the stock of existing homes for sale. That may well be a good thing because it will reduce the stock of existing inventory waiting to be sold.

In the process it will bid up existing home prices and eventually shrink the gap with newly-built housing. Either way, if you have been postponing your purchase of a home in hopes of a great deal, that time has come and gone.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.