What’s Next for the New Construction Homes Housing Market in 2021

The only way to help a housing shortage is to build more homes.

The U.S. certainly needs more homes to keep up with demand. Many buyers simply can’t find a home to purchase, or they’re competing with so many others that losing out in a bidding war has become commonplace. The National Association of Realtors reports that the number of existing home sales fell in May by 0.9% compared to May 2020, while the median home price is up year-over-year by 23.6%.

Unfortunately, homebuilders can’t complete new properties fast enough. A year’s worth of supply-chain issues, rising material costs and the coronavirus pandemic threatening the health and employment options for construction workers has slowed the rate of construction.

The homebuilding industry appears to have made a positive turn in a number of ways over the last couple months, but problems persist. Here’s what’s keeping the residential construction industry down, as well as options for homebuyers considering a new-construction home and what experts expect going forward.

[READ: What to Expect From the Housing Market in 2021.]

What’s Causing Construction Slowdowns?

The year 2020 started out with promising predictions for residential construction, with permit approvals up and signs of the long-term housing shortage easing to create a more balanced market between buyers and sellers.

Of course, the coronavirus pandemic that caused mass shutdowns of work operations — including construction in many parts of the U.S. — slowed everything down.

Additionally, the worldwide pandemic caused inconsistencies in global trade. The public in the U.S. is beginning to feel cautiously optimistic that an end to the pandemic is in sight more than halfway through 2021, and it’s certainly echoed in construction. “In the industry there’s some kind of palpable sense of relief that we’ve gotten through this extraordinarily difficult time,” says Barry LePatner, attorney and founder of LePatner & Associates, CEO of Insights+, which provides strategic planning and counsel specializing in construction projects, and the author of “Too Big to Fall: America’s Failing Infrastructure and the Way Forward.”

Still, residual hurdles are plaguing the construction business. Shipping delays have caused predicted completion dates for construction projects to lapse, and the cost of materials is jumping.

On May 7, the price of lumber reached an all-time high of $1,691.73 per thousand board feet, according to Trading Economics. Pre-pandemic lumber prices were commonly around $450 per thousand board feet.

Prices have come down since that peak, to the relief of the industry. As of July 20, the price of lumber was $540.85 per thousand board feet, Trading Economics reports. Still, the high cost of materials hasn’t been resolved yet.

“That hasn’t necessarily translated into lower costs for the builder yet,” says Robert Dietz, chief economist and senior vice president for economics and housing policy for the National Association of Home Builders. Other common homebuilding materials, like oriented strand board, are seeing price surges.

“We’ve got a ways to go before the supply chain is healing,” LePatner says.

Materials costs and shipping delays aren’t the only problem. “As the supply chain issues begin to unwind and improve somewhat, we should expect to see labor access be the new top challenge,” Dietz says.

A shortage of construction labor has persisted since the Great Recession, when many in the construction industry left permanently due to lack of available work. Since then, however, trends toward college degrees and away from trade schools and on-the-job construction training have reduced the skilled labor force necessary to build homes.

“This is probably the biggest threat to the industry going forward,” LePatner says. There’s no guaranteed solution to the construction labor shortage. Wages will likely have to rise to attract new workers, which will in turn drive up the total cost of new construction.

[Read: 10 Things You Need to Know When Buying a New Construction Home]

Can Homebuyers Still Get New Homes?

The number of new home purchases has certainly slowed amid the construction industry’s struggles, though it’s not impossible for buyers to find a new home to purchase.

In many cases, homebuilders have simply had to slow their timelines and cut down on how many deals they make at a time to avoid a glut of incomplete homes with impatient owners. “They’re rationing how many homes they’re even making available for people to put a down payment on,” says Nick Bailey, president of Re/Max.

You may be hoping to skirt the process of buying a home altogether by purchasing a plot of vacant land and building a custom home instead. You’ll avoid the competition among homebuyers for existing or new homes, but unfortunately you won’t be able to avoid the construction-related problems that can draw out the process and drive up the total cost.

Scott Lindner, national sales director for TD Bank Mortgage, says homebuyers looking to build a home instead will have to plan for additional costs, especially if they’re looking to finance with a construction loan or construction-to-permanent loan. “Consumers need to keep money aside — probably 15% to 20% of the (total cost) to account for overruns,” Lindner says.

Estimated costs are more important than ever, and you want to work with a contractor you can trust to be upfront about expected additional costs and obstacles. “Consumers really have to push the builders that they’re really comfortable with the costs (and) that the builder is not underestimating the cost at all,” Lindner says.

Finally, materials delays and high costs could cause major problems not just in terms of your ability to get into your new home, but also because these factors could create tension with your lender, who may only be flexible up to a certain point. Lindner stresses that if the cabinets you want or your ideal flooring won’t be available for months, consider being less picky. “If you can’t get that for six or nine months, this is where consumers will have to think about option A and option B, and even option C, sometimes, to keep their project moving forward,” Lindner says.

[Read: What Are Your Rights When It Comes to Nearby Construction?]

Can Construction Still Solve the Housing Shortage?

There are positive outlooks for home construction, and in many ways it’s simply a matter of allowing enough time for the construction industry to recover from recent setbacks and adapt to new ones to be able to ramp up building again.

There’s some catch-up to be expected before demand for housing will ease, however. “We had about a decade of underbuilding that left the market short of about a million homes,” Dietz says. He notes that the estimated shortage varies based on the source: While the NAHB estimates the shortage is at roughly 1 million homes, the NAR estimates a shortage of about 5.5 million homes.

In June, there were nearly 1.6 million permits for privately owned housing units approved for construction throughout the U.S., according to the U.S. Census Bureau, a 23.3% increase from June 2020. In May, there were even more at 1.68 million. While it will take time for these permits to turn into move-in ready homes, they’re a sign of positive moves.

“I think next year will be a bright spot for the industry,” Bailey says. Construction progresses seasonally, and Bailey says he’s encouraged by permit approvals that there will be a strong supply of new homes in the near future.

LePatner also points to 2022 as a good year for construction, though there will be some growing pains while builders, homebuyers and real estate professionals adjust. “It’s a fits-and-starts process through the end of this year,” he says.

More from U.S. News

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6 Common Home Code Violations and Questions to Ask Yourself When Approaching a Fix

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What’s Next for the New Construction Homes Housing Market in 2021 originally appeared on usnews.com

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