Jerry Howard, NAHB CEO, joins Yahoo Finance’s Kristin Myers to discuss the rising cost of lumber amid home building frenzy.
KRISTIN MYERS: The latest NAHB Index is out, and it shows that homebuilders are bullish on demand, even as lumber and home prices are rising. So let's bring in the CEO of the National Association of Home Builders, Jerry Howard now. Jerry, you know, we're seeing that bullish sentiment on homebuilding, but the prices of homes, as we were just discussing, are rising, as are the materials. How do you see that weighing on demand going forward?
JERRY HOWARD: Well, so far, demand is still high. Interest rates are low. People are still moving out of the urban areas, partially because of the pandemic, partially because of the urban unrest. And so demand for single-family housing is incredibly high right now. In fact, in many areas, you're getting bidding wars where a house will go on the market, and it'll be sold in two days for above whatever the original asking price was.
KRISTIN MYERS: Now, is that demand just strictly due to the pandemic, because that would seem as if that would be a bit of a headwind-- especially on that sentiment of those homebuilders. So does that demand continue to grow as long as we're still in this work-from-home environment? Or does it wane after we all go back to the office?
JERRY HOWARD: I think you've got a few things that are going on. You have people who may have stayed in their urban settings, in their apartments who are still moving out. You have people who for the last year and a half would have gone into the housing markets but couldn't and are now coming in as the economy recovers. And then you have the normal number of units that would be sold.
So we anticipate a pretty solid continued demand for housing. The problem is supply. We are-- in a healthy housing market, you would have six months supply in the chain. Right now, we only have about two months supply. So there's a lot of pressure on our members to build housing, housing that can be affordable at all points of the market, and you have an increase in costs because of the increase in material costs that's really causing a problem.
So the demand is there. There's real healthy demand. But in order for us to be able to satisfy it, we've got to do something about material costs. Otherwise, a lot of people will be priced out of the market.
KRISTIN MYERS: So let's talk about those material costs. What is causing them to rise? I was reading that timber, that is the raw materials-- for anyone who doesn't know the difference, I did not before-- I was seeing surplus there, at least when it comes to timber. And yet the lumber prices are so high. Why is that?
JERRY HOWARD: You know, that's the million dollar question right now. We have been trying to figure that out. As you point out, at the front end of the chain, the timber, the loggers are telling us that they're cutting down the logs, and they're not getting paid an exorbitant amount of money for them.
Then we talk again to the retail dealers and the distributors, they tell us that they're not getting the supply in. And when they are, they're having to pay a lot of money. So although we haven't gotten the evidence to prove it right now, all signs are pointing to the sawmills. The sawmills don't appear to be operating at full capacity, and they don't appear to want to operate at full capacity. And so they are really causing the headwinds and potentially leading to a downturn in the housing markets.
KRISTIN MYERS: Do you see that abating any time soon, these lumber prices-- or rather, these sawmills not operating at full steam? I'm sure the pandemic probably had something to do with that. We saw production all around in most industries and sectors decreasing throughout the pandemic. I'm wondering if you think, especially as this pandemic kind of reduces over time, if, perhaps, the sawmills will start to increase that production and cause those lumber prices to lower.
JERRY HOWARD: We are hopeful of that. This issue became apparent to us toward the tail end of the last administration. And they weighed in with the sawmills. We're trying to get the new administration through Secretary Raimondo to weigh in with them and see if they can get them to come up to capacity. That's the key. And unfortunately, it's in their hands.
KRISTIN MYERS: I'm wondering how long you think this demand is going to hold in the face of this supply, as you mentioned, which right now cannot meet it, and these costs of materials so high. I hear what you're talking about-- this little bit of a catch-22 in trying to meet that demand, but trying to keep those homes affordable in the face of those rising prices. How long do you think that that demand will continue to remain?
We hear a lot of talk of a housing bubble that is being formed right now. Are you seeing it the same way? Are there concerns a little bit further down the line?
JERRY HOWARD: Prices do appear to be rising at an unsustainably fast pace. We would prefer to see that cool off a little bit. And the only thing that can do that is increased supply. So do I see a potential problem down the road? Yes. Do I think it will be this year? Probably not-- probably more looking into next year as we move forward. But it puts pressure on us as builders to keep building a supply. And we'll keep doing that as long as the customers come in.
KRISTIN MYERS: Right now, how are homebuilders walking that line between keeping up the supply and dealing with those rising costs to try to meet that demand? How is that balance being struck right now?
JERRY HOWARD: Well, there have been two ways. The first is the builders were eating the excess costs themselves. And that was something that is, obviously, not sustainable if you're a businessman. You've got to make a certain profit in order to keep viable.
Moreover, now, unfortunately, we're getting appraisals for new homes that when the appraiser comes in and gives us a number, it's the exact number for the cost of construction with no margin for profit. And if there's no margin, obviously, that's unsustainable-- we're not going to do it. So that's number one.
Number two, they've been putting escalator clauses in the contracts so that if you contract with a builder to build a home for you, you will say, this is what it's going to cost me, this is what the final cost is. And oh, by the way, if this particular item-- be it lumber, drywall, whatever-- if this goes up inordinately, you're going to have to pay more. And if the housing consumer can afford to sign a contract with an escalator clause, they're doing it. Otherwise, that, too, will become a problem.
KRISTIN MYERS: Is this a true story all around the country right now? Or are there some markets that are doing a little bit better than others?
JERRY HOWARD: It's true pretty much all around the country. Builders that I talk to in virtually every state of the union are having this problem.
KRISTIN MYERS: All right. So then, unfortunately, everyone is feeling the squeeze absolutely everywhere. Jerry Howard, NAHB CEO, thanks so much for joining us today.