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    Supply and Demand Problem Plaguing New Construction

    Real estate economists have called on new home builders to ramp up production to help relieve the shortage of inventory of homes for sale throughout the country. The added inventory would no doubt assist buyers in their search to secure their dream home, while also helping to ease price increases throughout the United States.

    Unfortunately for builders, there are many forces that are making it difficult for them to do just that!

     The 4 “L’s” of new home construction:

    The idea of supply and demand is ripe in the new home construction industry. The four ‘L’s of new home construction are each suffering a supply problem, and with that comes added costs. Read below, to break it down.

    Lots – There is a shortage of land near metros at an affordable price, causing builders to move farther and farther away from cities to keep costs down. This is not always an attractive option for those who want to stay close to work.

    Labor – The Great Recession forced many skilled construction and trade workers to find other sources of income once their jobs were lost at the time of the crash. Even though the overall housing market has recovered, these workers have not returned. Those who remain are starting to retire, causing even more of a shortage and added costs.

    Lumber – The cost to build a new home is directly tied to the cost of the lot and the cost of the supplies needed to build the home. Lumber costs continue to increase due to policies restricting the importation of Canadian lumber, making larger luxury homes an attractive option to recoup costs when selling – rather than building smaller homes and making less revenue.

    Lending – During the Great Recession, many small community banks were forced to close their doors. These banks were a great source of capital and lending for builders looking to borrow money at a low interest rate in the community in which they were building. Tougher lending standards have made borrowing funds more expensive and difficult for builders.

    Additional costs across the lots, labor, lumber and lending have made building luxury properties more attractive to builders as they are able to make a larger margin with the higher sales price. The move to scale down to starter homes to help with supply will mean any additional costs are absorbed by the builders, unless the supply of the 4 ‘L’s can increase.

     

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