If you were a contractor in 2020, your phone was probably ringing off the hook. With an unprecedented increase in the number of people working from home, there was a shift in the public’s appetite from houses in urban centers to more spacious houses in the suburbs. Of course, the supply wasn’t always there, which kicked off a new construction boom. All regions except the Northeast experienced an increase in housing starts, with the largest increase in the South, at 12.9 percent. In the first two months of 2021, single-family starts were 6.4 percent higher than in the first two months of 2020.
New construction has some key advantages over existing construction. The biggest one is that new construction can satisfy demand when the inventory of existing homes isn’t there. In addition, new construction allows homeowners to truly customize their homes and create something turnkey that won’t require any immediate repairs. Another major draw is that you can build a house that will respond to the demands of climate change, both in terms of energy efficiency and durability. Advances in energy efficiency allow new construction homeowners to use fewer natural resources and spend less on their utilities. According to Chuck Fowke, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Tampa, Florida, newer construction homes are better able to endure extreme weather. “Evidence from FEMA and others supports this… Modern building codes have been very effective in preventing the destruction of homes due to various storms, fires and earthquakes,” he said. “For example, after Hurricane Michael hit Mexico Beach, Florida, in 2018, studies showed that homes built post-2000 remained standing, while older homes did not.”
Sounds like the only way to go is with new construction, right? Not so fast. As many people are learning, you wind up paying top dollar for new construction, which is true in any era. But right now the markup is even higher, due to an escalation in the cost of construction materials spurred by demand and limited production due to Covid. The National Association of Home Builders reported lumber prices spiking 180 percent between the spring of 2020 and April of 2021, with their report concluding that “This price spike has caused the price of an average new single-family home to increase by more than $24,000 since April 17, 2020.” Other construction materials such as steel, concrete, and copper wire have all seen sharp increases in the past year.
With a scarcity of materials, homeowners and developers investing in new construction should expect delays on their new property. Investors should be especially careful if they’re building a new rental property, with construction delays and increases in material costs having the potential to reduce their cashflow from rental income.
