Postrecession bargains have evaporated as builders cope with rising materials costs and a shortage of contractors and workers.
From storage sheds to swank new subdivisions, construction is booming in the Twin Cities. But for all the activity sprawling throughout the metro, there just aren’t enough workers, contractors or materials to keep pace.
The squeeze on resources is putting an end to many of the postrecession bargains on new construction that home buyers once enjoyed. The average price per square foot for new homes listed through the Multiple Listing Service is at a four-year high, jumping 7 percent from this month last year to $150.
The surge in prices is the result of a constellation of factors. During the recession, thousands of skilled workers fled the industry to pursue more fruitful careers, ultimately driving up the cost of labor. The price of building materials also rose sharply because lumber yards and manufacturers scaled back production during the worst of the housing downturn.
“The days of low bids and relatively inexpensive construction costs are clearly numbered,” said Stephen Sandherr, chief executive of Associated General Contractors of America.
The shift has new home buyers bracing to pay more — or jumping on deals while they still can. Earlier this summer, Al and Nancy Billington bought a newly built townhouse at a subdivision in Prior Lake that had all the amenities they were looking for, including stainless steel appliances and hardwood floors. The purchase ended up being right on time. If they had waited later on to build, the couple would have paid nearly $30,000 more for that same townhouse.
“It was an easy decision for us,” Al Billington said. “We decided to buy.”
While prices for new homes are increasing, they’re still a bargain compared with peak prices of 2007. Builders, however, are still in a position to raise prices because of growing demand for new, as well as existing, homes, according to a new report from Metrostudy.
“Consumers coming into the market today are going to have to pay fair market value because the deals are gone,” said Jeff Schoenwetter of JMS Custom Homes.
Houses are also bigger and more expensive to build now than they used to be, which is adding to the strain on labor and materials. The median sale price of new houses nationwide rose 15 percent in April to an all-time high, according to the U.S. Department of Commerce.
Stephen Melman, director of economic services for the National Association of Home Builders, estimated that half of all lumber mills shut down during the recession and 20 percent of builders nationwide recently reported a shortage of gypsum products.
“Demand picked up before the materials dealers could ramp up their supply,” said Melman. “You can’t just turn on a switch and have the whole thing going again.”
That’s especially true for lumber. During the recession, prices for framing lumber plummeted, falling to less than $200 per 1,000 board feet, according to Random Lengths, an online newsletter that tracks U.S. lumber prices. But demand is back, and prices have skyrocketed as mills struggle to keep pace with orders. During April, framing lumber hit an all-time high of $451 per 1,000 board feet.
That lumber, including wall studs and plywood products, represents the single-largest construction cost for a new house. The National Association of Home Builders says that for an average 2,311 square-foot house that would cost $310,000, the lumber package would cost about $25,000, almost 14 percent of the total construction cost.
For builders already operating on razor-thin profit margins, such price volatility has been a major challenge. Some builders buy lumber and other materials in bulk and are able to lock in prices with long-term contracts. That approach can be dicey depending on their timing.
Builders face the same issue when it comes to developable land, which is in short supply within the seven-county metro area. Lot inventory throughout the metro has fallen 12 percent from pre-boom levels, according to Metrostudy.
“We will need to see substantial lot deliveries across the metro in order to meet demand,” said Ryan Jones, director of Metrostudy’s Twin Cities division.
That’s especially true in the suburbs closest to the Twin Cities because a growing number of new-home buyers are willing to forgo big, multi-acre tracts in exurban communities in favor of ones that are closer to the Twin Cities.
At a small infill development just a couple of miles from downtown St. Paul, for example, 13 building sites were platted when an old school was torn down. Those lots went on the market in April 2012, and sold within a month for $275,000 to $380,000 apiece, according to listing agent, Jim Seabold of Coldwell Banker Burnet.