Welcome to our Real Estate news roundup, where we delve into the latest trends and updates shaping the housing market. Today, we explore a variety of pressing topics, from the unexpected decline in new home sales to the ongoing debates over building codes and energy efficiency in Kansas City. Whether you’re a homebuyer, builder, or just keen on the dynamics of real estate, our coverage offers insightful analysis and essential information to help you stay informed. Dive deeper into each story by following our detailed reports and analyses.
New Residential Sales Press Release
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Mediocre New House Sales In June Confirm Home Builders’ Pessimism
An aerial view of new homes under construction.
As expected, today’s “New Residential Sales” report matched the other weak measures: The pessimistic home builder survey results, the declining real (inflation-adjusted) median sales prices, the low lumber prices.
The only bright spot is the home builder stock price run-ups to new all-time highs. Or is that mismatch a sign of excess investor optimism?
However that shakes out, here are the uninspiring fundamentals:
Note that the next six months are weaker than the first six. That is a strong seasonal shift that “seasonally adjusted” data attempt to hide. But the reality is that home builders gear down during the long period.
New house sales pre- and post-Covid 2020
Seasonal adjustments for home building
Home builders are normally very sensitive to their stock of “new houses for sale” inventories. They tend to average about six months of sales. Now, though, they have been carrying about nine months supply, a very significant 50% overage. Therefore, expect construction to get trimmed doubly: for the seasonal sales decline and for the readjustment of the high inventories.
Houses sold and for sale
After rising about 30%, nominal prices have stagnated. Adjusted for inflation, the prices are actually declining. Thus, another sign of a weakening new house market.
New house prices, nominal and inflation-adjusted
Inflation-adjusted lumber prices are back to their 2020 Covid lows. That is another important sign of slack home building.
Lumber prices, nominal and inflation-adjusted
New house construction is an important economic activity that boosts other industries. It also reflects the state of potential home buyers. Therefore, the weakening we are seeing carries the risk of a recession ahead.
Why? Because, despite the Federal Reserve assurances of having tamed inflation, prices continue to compound higher, eating into savings and income and budgets.
What about the Fed dropping interest rates? If it does so, mortgage rates are unlikely to follow suit. (See my recent article, “Home Builder Stocks Are At Risk.”)
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Framing Lumber Prices | NAHB
The framing lumber composite price rose (0.6%) during the week ending July 19. It was the first weekly increase in several weeks, after dropping the previous week to its lowest price since April 2020. NAHB continually tracks the latest lumber prices and futures prices, and provides an overview of the behaviors within the U.S. framing lumber market. The information is sourced each week using the Random Lengths framing lumber composite price which is comprised using prices from the highest volume-producing regions of the U.S. and Canada. A summary of other wood prices, including plywood prices, is included below.
Summary of the week-to-week lumber prices and plywood prices for the week ending July 19, 2024:
Softwood lumber prices have been especially volatile in recent years largely because of increased demand, rising tariffs, supply-chain bottlenecks and insufficient domestic production. To address the high prices for lumber, NAHB has advocated for the following actions:
In addition to narrowly defined framing lumber, products such as plywood, OSB, particleboard, fiberboard, shakes and shingles make up a considerable portion of the total materials (and cost) of a new home.
Surveys conducted by Home Innovation Research Labs show that the average new single-family home uses more than 2,200 square feet of softwood plywood, and more than 6,800 of OSB, in addition to roughly 15,000 board feet of framing lumber. Softwood lumber is also an input into certain manufactured products used in residential construction — especially cabinets, windows, doors and trusses.
To account for the manufacturer’s margin, sawmill prices for the lumber embodied in these products are marked up by the percent difference between receipts and cost of goods in the “wood product manufacturing” industry, as reported in the IRS Returns of Active Corporations tables.
Final pricing for home buyers is somewhat higher because of factors such as interest on construction loans, brokers’ fees, and margins required to attract capital and get construction loans underwritten. As explained in NAHB’s study on regulatory costs, for items used during the construction process, the final home price will increase by nearly 15% above the builder’s cost.
The bottom line is that changes in softwood lumber prices directly impact the price of a new home. This, along with rising wages for construction workers and higher interest rates, is one of the reasons the housing market is experiencing declining affordability.
Homebuilders and remodelers begin to get price relief once mill prices have substantially decreased for an extended period and/or stabilized. Note that large price decreases alone may not be sufficient. Prices must fall for long enough periods of time to sufficiently lower a supplier’s average costs after a run-up.
Depending on the rate and consistency of price decreases and whether prices have stabilized at the lower level, it may take at least a few weeks to a couple of months for builders to see price relief on the order initially reported in the lumber futures or cash markets.
The length of this “waiting period” for lumber price reductions varies with builder size, supplier size, and the specific builder-supplier relationship. Buying power is positively correlated with the size of a residential construction firm, while the same is typically true for suppliers’ selling power. The relative difference in market power between the buyer and seller is crucial in determining how quickly lower prices transmit to a customer.
In contrast to the dynamics of an environment with falling prices, higher prices reach builders much more quickly when market prices are increasing. The same forces that lead to large lags relative to mill prices on the way down can help explain why builders’ lumber costs may increase contemporaneously with mill prices.
Wholesalers tend to be “trigger happy” when prices skyrocket. As the cost of their inventory is low relative to cash prices during these periods, they will quote at or near current market prices. The environment is one in which wholesalers are assured to buy low and sell high.
However, wholesalers cannot predict when a bull market is going to end and buy their lumber according to how likely they believe it will last. As different buyers may have different forecasts, disparities in purchasing behavior can arise. A wholesaler who assumes lumber prices will keep rising for two months will buy more inventory than one assuming the run will last for only two weeks.
Retailers generally have less buying power than wholesalers have selling power. In such a scenario, the retailer (e.g., lumberyard) is said to be a “price taker.” As a result, their inventory costs tend to increase in step with market prices.
These higher costs are passed on to builders in order to maintain positive operating margins. This is why lumber retailers are less likely than wholesalers to realize outsized profits when prices are rising.
The analysis above was authored by Jesse Wade, NAHB director of tax and trade policy analysis. Mr. Wade has expertise in tracking and analyzing short- and long-term trends in commodities pricing, particularly for framing lumber, steel, gypsum and other common building material products used in residential construction.
Tackling the affordability crisis and the key issues that must be addressed to ensure a robust housing market.
Builders push for more flexible building codes in Kansas City
The Kansas City Council gave homebuilders new rules last year designed to make housing easier on the environment. Those rules told them what kind of windows to install, how well the walls should be insulated, and how efficient the heating and air conditioning systems should be.
Developers now blame those rules for a construction slowdown that’s keeping the housing market tight and posing obstacles to making more of those homes affordable to more people. But environmentalists say the new code needs more time to work. Ditching it, they contend, will lead to construction of energy-hog homes, adding to global climate change, and stick owners and tenants with higher energy bills.
“It will lead to less efficient and more costly homes,” said Billy Davies, conservation program coordinator for the Missouri chapter of the Sierra Club.
Some regional homebuilders want the city to relax the energy-efficiency rules of the building code it put into action last year. Rather than a rigorous checklist that dictates specifics, they want a general scoring system that gives them options to hit the mark on conserving energy. That, they say, can help them keep costs down and keep housing more affordable.
“What this is intended to do is add flexibility within the process for the contractor, the homebuilder, and the homebuyer,” said Will Ruder, the executive vice president of the Home Builders Association of Greater Kansas City.
Groups defending the existing, stricter code see it as the only way for Kansas City to hit its goal of reducing greenhouse gas emissions 100% by 2040. Buildings play a critical role in this effort, as they are responsible for 40% of greenhouse gas emissions, said architecture instructor at the University of Missouri-Kansas City Dominic Musso. “So something needs to be done if we’re going to create as big of an impact,” he said.
The Kansas City Council adopted the 2021 International Energy Conservation Code in July 2023. That code offers builders three ways to comply with its energy standards.
However, homebuilders want more flexibility. They say they’re willing to build energy-efficient housing, but they just want to figure out the best way to do that themselves. So they’ve suggested a fourth option: achieving a Home Energy Rating System score of 68 or lower to qualify for permits.
The HERS scale, created by the Residential Energy Services Network, uses a baseline score of 100 to represent the energy use of a home built to the 2006 International Energy Conservation Code. The lower the score, the better the energy efficiency.
But Davies said that the new proposal sets the standard too low by referring to energy standards set almost two decades ago. And he said the standard isn’t tough enough. In California, new homes average a HERS score of 18.
“This is a score that is so easy to meet,” he said, “that it practically makes the code null and void.”
But Ruder with the homebuilders group said a HERS score of 68 is equal to the average in suburbs like Overland Park and Prairie Village, making it the lowest and most energy-efficient score in the metro.
The city code adopted last year requires more effective wall insulation, energy-efficient furnaces, and updated windows that help maintain indoor temperatures.
The homebuilders want the leeway to upgrade windows, walls, and furnaces to different standards so long as the home produces an energy rating of 68 or lower.
Ruder said that would avoid wasted expenses for buyers.
Davies said that the current energy code is crucial for protecting residents from the impacts of climate change.
“What (the homebuilders’ proposed change) does is create a loophole in Kansas City’s ordinance by weakening the energy policy and allowing developers to build more cheaply,” he said.
Davies said that he is also concerned that the proposed ordinance only requires energy testing for the first home in a development plan, which could lead to undetected issues and increased costs for homeowners.
“Imagine if there’s no testing,” he said. “Then the occupant could learn a year after they moved in that their utility bill is really high — there’s some kind of leak or other issues.”
Ruder said that builders want the City Council to change the language at its next meeting (July 23) to ensure that every home undergoes energy inspections.
Builders blame the current energy code for Kansas City’s housing shortage, partly for slowing down the rate building permits get approved. The city averaged 60 permits per month between October 2023 and June, Ruder said. That same nine-month period averaged 66 permits a month over the last two years and 85 permits a month over the last four years.
Davies said that a drop in permits is common when new codes are introduced. He said construction workers who have already adapted to the current code shouldn’t have to learn a new one so soon.
“Kansas City needs to give the experts in the building community who want to work with this (2021) code more time to make it happen,” Davies said.
Steven Bennett, a professor in the Construction Management department at Johnson County Community College, said that Kansas City has historically had a slow permit process. But he finds the delays over the last nine months excessive. He said nearby cities typically need one to two months to adapt to new building codes.
The Home Builders Association estimated that following the current standard can add up to $31,000 to the price of a 2,400-square-foot, two-story home. Bennett, who has also taught classes on green building, agrees. He said that while builders should strive for better energy efficiency, the city’s existing energy standards are too pricey.
“It’s going to impact the owner’s cost to build, which in turn increases rent and lease costs for those utilizing these homes,” Bennett said.
He said that the code increases home construction costs by up to 30%. However, the U.S. Department of Housing and Urban Development states that the international standards adopted in 2021 add about $7,200 to the cost of a single-family home.
Musso at UMKC believes that the added expenses from an updated energy code are worthwhile.
“You don’t want to do it cheap up front and then have everything not give you the performance that it should,” he said.
Conservationists agree. They say that the money residents will save on utility bills will eventually offset the upfront cost of building to the city’s current standard. The U.S. Department of Energy found that the average new homeowner in Missouri can expect to save $677 annually on their utility bills, which average out to $2,603 annually.
That would take roughly 10 years to break even under HUD’s upfront cost estimation.
But homebuilders have different ideas about the cost-benefit ratio for homeowners.
Bennett said that in his experience, savings aren’t as great as significant as energy agencies claim. Even if they are, he questions the value.
“If you saw a home with a break-even deal in 10 years, I don’t know that I would advise you to do it,” he said. “You’re probably going to move out and never see that savings.”
The Home Builders Association calculated that utility savings would only be $90 to $125 per year for a 1,400-square-foot starter home, using average gas prices from Spire and average electric costs from Evergy, Ruder said.
MILI MANSARAY is the housing and labor reporter at The Kansas City Beacon. Previously, she was a freelance reporter and Summer 2020 intern.
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