While 2017 was a hot year for the housing market, homebuilders face cost challenges that will carry through 2018.
According to John Burns Real Estate Consulting Group’s survey of 300 homebuilding executives, 40% were surprised by how much their costs increased last year.
Builders have to increase pay for workers as “stronger than expected sales have pushed construction trades to the limit,” said John Burns’ SVP Jody Kahn. She specifically cites the lack of immigrant labor as a headwind.
Buildable land is also in limited supply, with finished lot prices exceeding the prior 2006 peak by 2%. And, the costs of materials, especially lumber, drywall and concrete have been burdensome on builders, according to Kahn.
“Lumber was on an upward trend even before some of the catastrophic natural disaster events that we’ve seen… So that’s the one that I think we all need to be paying attention to for 2018. The lumber impacts could be longer lasting,” he said.
The reason for the increase in lumber price is, in part, due to the tariff on Canadian lumber, which comes amid talks to renegotiate NAFTA terms. The U.S. heavily depends on Canada for its lumber. In 2016, 33% of the softwood lumber used in the U.S. was imported, with more than 95% coming from Canada, according to the National Association of Home Builders.
The hurricane effect
In addition, the damaging effects of Hurricanes Harvey and Irma could trickle throughout 2018. Eleven billion dollars worth of building materials were required to clean up Florida and Texas, and Kahn expects an additional $10 billion in 2018. She estimates spending on building materials rose 9% last year and may rise another 5% this year.
As costs continue to surge, it will only translate to more price increases for homebuyers.
Jeff Mezger, CEO of KBHomes (KBH) said that he is “cautious” and “concerned” about how subsequent storms would further impact labor shortages during his third-quarter conference call. And, the company has been successful in raising prices above any direct cost increases that they’ve experienced, and subsequently reported higher margins.
“We do not expect the broad-based labor shortages and related cost increases and delays will resolve in the near future. We also do not anticipate regulatory approval hurdles to ease, or lot and land prices to decline,” noted Kahn.
Melody Hahm is a senior writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.