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Homebuilding Slows Due to Rising Construction Costs

February 19, 2021

Despite a surge in buyer demand, fewer new homes were built in January. Builders blame rising material costs.

Housing starts fell 6% in January month over month to a seasonally adjusted annual rate of 1.58 million, according to a report released Thursday from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The decrease was led by single-family starts, which were down 12.2%. However, the volatile multifamily sector, which includes apartment buildings and condos, increased 17.1% last month.

“Concerns over higher lumber prices produced softness for the housing market amid solid buyer traffic at the start of the year,” says Chuck Fowke, chairman of the National Association of Home Builders. “With the cost of building materials rising at a rapid pace, the challenge for builders is to keep home prices at an affordable level for buyers even as the regulatory policy environment may become more challenging.”

Lumber prices recently reached record highs. Those extra costs for lumber are forcing builders to have to increase the costs of their new homes and prompting construction delays. Read more: Lumber Prices Surge to Another Record High

“The big question is whether builders can navigate the opportunities of favorable demographics and mortgage rates against the challenges of rising materials, labor, and land costs,” says George Ratiu, senior economist at realtor.com®. “For housing, new construction is the answer to current supply constraints and the affordability crisis.”

There is hope for a turnaround. While home building was down in January, the pace of building permits was at the highest rate since 2006. Permits on single-family homes, a gauge for future construction, was nearly 10% higher in January than December and 28% higher than a year ago. Permits for both single-family and multifamily construction were highest in the Northeast last month, up 39.3% in January compared to December, followed by an 11.7% jump in the West, and an 8.3% increase in the South. The Midwest was the only major region of the U.S. to post a decrease in permits, down 0.8% month over month.