These days (March 2021), a lot of people are wondering whether they should build now or wait. Lumber prices have doubled post-COVID. The labor market is pretty tight. In most areas, home inventory is relatively low and prices are high. And a lot of people have reconsidered their housing situation since they’ve been spending so much time at home. A lot of them are building, driving prices up. On the bright side, interest rates are still very low. So, should you build now or wait? Here are a few things to consider.
Interest Rates are a Big Deal
As I write this, 30 year fixed mortgage rates are running at about 3%. That’s up from their ridiculous lows a couple of months ago, but not by month. While construction loans are often written at slightly higher rates than mortgages, changes in mortgage rates are a good benchmark for changes in construction loan rates. A traditional construction loan is usually an interest-only loan that only runs for the period of your construction. They’re usually paid off with a mortgage once the house is complete. But some banks offer “single close” construction loans that will automatically convert into a mortgage. Usually, these convert to ARMs (adjustable rate mortgages), but occasionally you can find one that automatically converts to a fixed-rate mortgage. That’s what we did, though rates have dropped since we got our loan. We may refinance if rates continue to stay low through our completion.
Anyway, that’s a long way of getting to: loan interest rates are a big deal. If you’re able to snap up a single-close construction loan that converts to a fixed mortgage rate, you’re locking in your rate for 15-30 years. And if you compare, say, a 3% mortgage vs. a 4% mortgage over 30 years on a $600,000 build, the 3% gives you $330 or so in your pocket every month, and you ultimately pay $120,000 less in interest over the life of the loan. The lower the interest rates, the more house you can buy (or afford to build).
The Federal Reserve has indicated they are interested in keeping interest rates low for a while, but they’re still currently at very low levels. There isn’t much place they can go but up.
Predicting Lumber Prices is Hard
COVID-19 did a number of things at the same time: it shut down sawmills for months, it sent a bunch of people home where they could finally get to home improvement projects, and it sent a bunch of people home to where they were unhappy with their homes and decided to move or build. It was also combined with a bad hurricane season in the southern US, and hurricanes eat a lot of lumber. So lumber spiked to all-time highs. The change wasn’t just academic – if you walked into Home Depot in February 2020 and again in September 2020, the cost of a 2×4 about doubled. Here is what the overall price of lumber looks like over the course of the past five years:
Ironically, the tippy top of the spike was right about when we completed rough framing. So perhaps you shouldn’t take timing advice from me.
So, will lumber prices come back down? One of the best indicators is the Lumber Futures market. Lumber Futures essentially track contracts for future lumber delivery. If you’re a developer building 1,000 homes this summer, you can buy your lumber in advance and lock in a contract price for delivery at a certain future date at a future price. Here is what those numbers look like in the short term:
Keep in mind, home developers aren’t the only once who purchase lumber futures. There are also plenty of “speculators” in the market who buy and sell futures in order to make money, without ever intending to take delivery of dead trees. That’s why at one point after the onset of the pandemic oil futures were negative – so many people were trying to sell oil that you had to pay to store it for a while. Anyway, these numbers represent the market’s best guess as to what lumber prices are going to do in the future.
Compare those numbers to the historic prices, and you’ll see that though the market is betting that prices will ease some, the market is still betting they’ll stay above pre-COVID highs.
Predicting the Labor and Housing Markets is Harder
And even then, unless you’re building the house yourself, the biggest big-picture line item in building a house isn’t lumber or nails or concrete. It’s labor. The local labor market, not the national labor market, is the biggest driver in the actual cost to build a house. And it’s a tough thing to predict with any accuracy. For example, here’s a Washington Post piece on understanding the labor market in 24 (!) factors. Good luck with that.
We also have a different housing market than we had a year ago, and it’s likely to keep changing fairly quickly. The price of existing housing stock has a big impact on what it costs to build. More on that here. And it’s another very challenging thing to forecast.
So should you Build Now or Wait?
If anybody tells you that they can predict the housing market, the labor market, construction prices, and interest prices with month-to-month accuracy, you should only trust them if they’re a billionaire calling you from their mega yacht in the Mediterranean. That sort of accuracy is worth a ton of money. Maybe the market will homebuilding will improve, but trying to time the market is dangerous. Generally, the best time to buy something is before prices go up, and the second best time is before prices go up again.
Also keep in mind that money decisions are also often mental health decisions, particularly when they’re big enough. If you wait to build, you’ll likely be tracking the housing and lumber markets for months, fretting about any upward movement. That likely isn’t going to happen if you start to build. And of course, it’s a lot easier to read about being wrong if you’re doing it from your new house.
That’s not to say everybody ought to build. I think the build vs. buy decision is a big one, and a lot of people are better off just buying a house. More on that here. Or, if you’re looking for further reading, check out our resources page.
Book Reviews
Continuing my mini-reviews of homebuilding and interior design books:
Human Spaces: Some decent ideas here but over half the book focuses on commercial space.
Home for the Soul: This whole book seems to be focused on the idea that everything must have as much texture as possible. Chipped paint + linen throws + chrome bowls… If that’s your style it’s a fine book. But otherwise it’s not a must-have.
Atmosphere: The Seven Elements of Great Design: Some okay ideas here, like the importance of proportion when it comes to interior design, for example. But the example photos are a lot like the Ray Booth interiors – they all look like they’re from staged high-end real estate listings that nobody has ever lived in.