Many of you are probably acutely aware that the cost of lumber has risen dramatically over the last year. Builders are building and many people seem interested in renovating their home right now -- so demand is outstripping supply. But here is a chart from Fortune, with data from Random Lengths, showing you just how wild things have gotten. Back in April 2020, lumber was going for about $358 per thousand board feet, according to this data. As of the beginning of this month, the number had jumped to $1,048, which represents an all-time high and a 193% year-over-year increase. Who knows where pricing will go next, but the National Association of Home Builders is estimating that current pricing has added about $24,000 to the price of a typical new single-family home in the US.
Image: Fortune
On my way back from Philadelphia this past weekend I wrote a post called, The Philadelphia (real estate) story. It was about how opposite the market is in Philly compared to Toronto.
After writing that post and because of a discussion in the comment section, I started thinking about condo vs. rental apartment development across the US. Because unlike cities such as Toronto and Vancouver, it struck me that – outside of maybe New York and Miami – most U.S. cities are really not building a lot of for sale condos. And if you’re from Toronto or Vancouver, I bet that feels odd to you.
But what exactly is that number?
As of the first quarter of 2015, condos as a percentage of all new multifamily (apartment) construction in the US was only 5.5%. That’s a tiny number and is down from over 50% before the Great Recession, which means most cities in the US really are building mostly rental. Last year the US built 264,000 multifamily units across 11,000 buildings.
So why is that happening?
There appears to be a number of factors, according to a recent article in the Wall Street Journal.
There’s a supply side constraint:
Another obstacle cited by developers: construction loans. Matt Allen, chief operating officer of the Related Group, a developer based in Miami, said he can get a construction loan for roughly 75% of the cost of building an apartment complex. But lenders will cover only 50%, on average, of a condo complex’s cost because of the greater risk, he said.
There’s a demand side constraint:
As a result, the Federal Housing Administration, which backs mortgages made to low-wealth buyers, tightened its lending standards in a series of moves from 2008 to 2012. Under the new rules, in order for the FHA to insure mortgages in a given condo complex, at least half of the units must be owner-occupied and no more than half can be FHA-insured, among other requirements. For condo projects under development, at least 30% of units must be under contract for sale before the FHA will start backing mortgages there. Mortgage giants Fannie Mae and Freddie Mac tightened their standards as well.
And there are macroeconomic factors:
On the entry-level end, tepid job growth early in the recovery and the younger generation’s affinity for flexibility have fueled demand for rentals. Apartment rents are up nearly 16% since 2010, according to Reis Inc.
Notwithstanding the above, could this be a post-recession policy pendulum that has swung too far in one direction?
I just got home from the 34th annual BILD awards. It’s late and I’m tired, but I had a good time. TAS won a few awards, including green builder of the year, and I saw a lot of old friends and familiar faces.
For those of you not in the industry, BILD is the Building Industry and Land Development Association. And every year a gala is held where a bunch of awards are given out for things ranging from the best marketing brochure to the best suite design under 750 square feet. If you’d like to get a feel for the event, check out #BILDAWARDS.
It was held out in Woodbridge, which is a suburb of Toronto. So today, I did something that I don’t do all that often or even every week: I drove my car. That’s fine, but it reminded me that one of the perks of living in a dense and transit oriented area (like downtown Toronto), is that you never have to worry about drinking and driving.
I’m really disciplined about not doing that, but it’s nice not to have to worry about it. It can make driving feel like a liability. So there’s another reason to love cities. You can drink whenever you want.