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Prices, timeframes, and material selections, etc. So many things are clouding the crystal ball of today’s home buyer. What do you do? Do you wait and watch home prices go up along with today’s record-low interest rates? What if they never come back down? Do you jump in now and build a home? Never before have home buyers been so confused by the new home market. But you’re not alone. Realtors, builders, appraisers, lenders, etc., are in the same boat. This market is tricky for everyone involved in it. Let’s interpret some of the signs that are appearing in the home buyer’s crystal ball!
Should I Buy or Build a Home?
The inventories for existing homes are at an all-time low. In many markets, the homes that are still in the inventory are there for a reason. Good homes sell fast. If you want it, you have to compete with ten or more people, have an all-cash offer, waive the typical home inspection, and come in with an offer that is sometimes way above the asking price.
Buying a used home used to be less stressful than building a new home because you have fewer decisions to make. Nowadays, offers require no home inspection contingency. Without a home inspection, it’s like buying a car without getting the opportunity to look under the hood. Depending on the age of the home, buying an existing home means buying all of its problems. About half of the average house needs replaced during its first 30 years. The big dollar items include the roof, the heating and cooling system, and the home’s appliances. So, what do you do?
While building a home will take longer there are several advantages that can far outweigh the initial stresses of all the decisions that will need to be made. Here are a few:
- You Get to Choose Your Floor Plan and Colors
- Lower Energy Bills through much more energy-efficient homes
- Homes today are just more comfortable to live in.
- Homes are healthier with better indoor air quality
Building a home is more of an effort with many decisions to be made. But ultimately, you get your house, your way and with modular construction, the timeframe is compressed compared with onsite construction.
Are Mortgage Interest Rates Going to Stay Low?
First, the good news, interest rates are still at historic lows. Because of COVID’s impact on the economy, the FED has pledged to keep interest rates low to stimulate the economy. Now the bad news, an overstimulated economy creates inflation. The way the FED combats inflation is to raise the interest rate to slow down buying. House prices are rising; food prices are rising; gas prices are rising. The economy seems to be doing well, but is it doing too well?
FOMO, the Fear Of Missing Out, is driving many people to buy homes, especially if they are going to have a mortgage. Prices are going up, but a sub-3% interest rate more than offsets much of the price increase. However, by comparison, rates just a few years ago hovered in the 4% range. With the current economy, interest rate increases are inevitable as the government tries to reduce inflation. Interest rates impact your buying power. For every .5% (one-half) percent increase in interest rate, your purchasing power may be decreased by 4 to 5 percent (the percentage is smaller for lower loan amounts). For every 1 percent interest rate increase, your purchasing power may be decreased by 9 to 11 percent (the percentage is smaller for lower loan amounts).
Why are Home Price Increasing So Much?
You name it, and its price is increasing. Lumber is one of the main culprits. Just to give you an idea of typical lumber prices as a layperson, for the last several years, lumber has traded around $300-$400 per 1,000 feet of random board lengths. Just a few weeks ago, the futures for lumber traded at over $1,600 per 1,000 feet of random board lengths. A year ago, a sheet of OSB (the sheathing used in floors, walls, and roofs) cost around $8 per sheet. Today it is selling at over $50 per sheet. Lumber makes up about 19% of the average home. Now add in the price increases for everything else.
Everything used to build a home is going up! Shingles, windows, doors, wiring, trim, flooring, etc. You name it, and its price is increasing. Historically, building material producers raised their prices once per year. Typically, every year between January and April, an annual price increase of 1%-7% (depending on the product) would be issued. That was it. That was the basic price for the rest of the year. Commodities like lumber could go up and down, but that was usually within a small range, and it went up AND down, not just up!
What is the Broken Supply Chain?
Where did all the people go? While those are famous words in a song, they resonate loudly in the home-building business. Just like with every other industry or business, there just aren’t enough people. From workers in materials manufacturer’s factories to truck drivers to deliver the products, there just aren’t enough people. When you don’t have people, materials aren’t produced, and materials aren’t delivered. You have what is called a broken supply chain.
The broken supply chain is wreaking havoc on builders that build onsite, it is now even impacting modular construction. In a typical modular home building process, a factory would like to see about a 5-6 week backlog of orders. Here is the typical process:
Week 1 – The order comes in. The order is reviewed for accuracy, and then the purchasing department reviews the items on the order to make sure there are no special items or back ordered items. If none, then the materials are ordered for the home to be produced. The price is locked in and typically doesn’t change at this point.
Weeks 2-3 – The materials that were ordered come in and are inventoried.
Week 4-5 – Slack time is built in to allow items to be prepped for the home to go into production. Any items that arrive that are broken, damaged or wrong are reordered to in be prior to the home starting in production.
Week 6 – The home that is to be modularly constructed goes into production. The average factory takes about a week to produce the average-sized home. The house comes off line, is reviewed and prepped for shipping, and then shipped to the home site.
Today, the broken supply chain coupled with price increases on a weekly, or sometimes daily basis means turmoil in what is typically are very organized system of homebuilding. Let’s take a look:
Week 1 – The order comes in. The order is reviewed for accuracy and then the purchasing department reviews the items on the order to make sure there are no special items or back ordered items. The suppliers now have limited colors and discontinued items. Those items are kicked back to the customer to get new selections. If none, then the materials are ordered for the home to be produced. The price is reviewed for a surcharge increase at this time or perhaps weeks before the home is scheduled for production. The home buyer is charged the escalated price for the materials guided by the escalation clause in the home builder’s contract.
Weeks 2-12 – The materials that were ordered come in and are inventoried. Backlogs, discontinued products, and out-of-stock products are prevalent. Purchasing talks to the builder, and the builder talks to the customer to get new selections and alternative items. Doors and windows can have 12-week backlogs. Shingle colors can be reduced from 24 selections to as little 3 or 8 from some suppliers.
Week 12-14 – Slack time is built in to allow items to be prepped for the home to go into production. Any items that arrive that are broken, damaged or wrong are reordered to be prior to the home starting in production. The items typically won’t be in time so the decision has to be made to either produce the home without the product or to delay production pending the items arrival. For important things like windows and doors that don’t arrive, the home’s production may be delayed for weeks.
Week 15 – The home that is to be modularly constructed goes into production. The average factory takes about a week or more to produce the average-sized home. Labor is an issue now because it’s hard to staff the factory. It can take longer to produce the home. The house comes offline, is reviewed, and prepped for shipping. Depending on if there are drivers and trucks available, the home is then shipped to the home site.
The process has changed considerably under the current conditions. Builders, lenders, home buyers, appraisers, etc., have never seen conditions like this in the new home market.
A Smoother Path to Homeownership
With all of the chaos in the new home market, modular construction still means a faster and smoother path to homeownership. Modular construction takes home construction and turns it into a manufacturing process. By becoming a manufacturing process, this means that building systems can be applied to create many of the components of a home in a factory environment. These high-quality components can then be assembled into a larger component (or module), creating high quality, energy-efficient, well-designed, value-driven, and very custom home.
When you are gazing into your personal crystal ball as you decide the path to take for your new home, just remember that if you are going to have a mortgage, interest rates are at historic lows for now. Home prices will probably level out in the coming months. Lead times are long. Builders, suppliers, and even modular home factories are taking 2-4 times longer than normal. But site builders are taking longer then ever. Many are into mid-2022 for home delivery. So, while your crystal ball may be a little cloudy, clear it up by taking the path of choosing modular construction for your new home!
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