Will decreasing lumber prices impact Arizona real estate?
Despite inflation, the real estate market continues to make headlines in Phoenix, there is one vital product that is starting to see a slowdown: lumber. According to Statista, in May lumber prices hit a low of $780 per thousand board feet, now the average cost is $608. Looking at a year ago, this is roughly a 68% drop in costs compared to the peak of Arizona lumber prices in May 2021, $1,670.00. Many potential homebuyers are wondering if they will see a price drop as they look to build homes.
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Lumber prices began to increase rapidly in March 2020 when many U.S lumber companies reduced production due to stay-at-home orders and decreased consumer activity. Soon after, when the Federal Reserve lowered interest rates, demand for lumber exceeded supply, driving costs even higher. Inflated costs of materials caused the average price of a new, single-family home to increase by more than $18,600 between 2020 and 2021, according to the NAHB.
Average Arizona lumber prices are returning to normal, and new single-family home builds are expected to drop in price over time. Prices are expected to decline as long as lumber prices continue to level out, which could lead to the overall stabilization of home prices in the coming months. On average, a single-family home build uses between $30,000 to $40,000 of lumber.
Furthermore, Arizona’s real estate marketing is experiencing a shift. In an effort to curb the rising national inflation rate, the Federal Reserve raised interest rates by .75%. Nationally, the current average rate for a 30-year-fixed-rate mortgage is close to 6%, compared to June 2021 when the average was 2.99%. The median listing home price for a home in Phoenix in November 2020 was $417,000. Today, the average is $475,000, according to realtor.com. With these higher rates, fewer people will be looking to finance a home compared to the past couple of years.
Labor and material shortages increase the time required to build new homes by as much as a year, complicating new home pricing. Between the decrease in lumber prices and the increase in interest rates, we are likely to see a decrease in resale home prices soon. Most new home builders have a backlog of homes that will be completed over the next year, slowed by labor and materials shortages. Homebuilders will maintain current pricing to protect their backlog and will offer incentives on new home sales in existing communities.
Author: Since his first construction job as a remodeling helper at 13, Tim Morris has spent most of his career life in constructing and selling buildings. Morris, an associate broker with HomeSmart, describes himself as a “mud-on-the-boots real estate & construction professional”. He started as a construction laborer at age 13 and developed into executive management and business start-up. He lives and leads by Zig Ziglar’s mantra that “you don’t build a business, you build people, and then the people build the business.”