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Even without looking at prices, you can tell when real estate is hot. More people want to become agents, and more “house-flipping” shows are on TV.
Why would anyone want to be an agent, anyway? There are fewer homes for sale now than at any time in nearly four decades — 1.04 million at the end of January, says the National Association of Realtors. Yet NAR says 1.45 million agents, up 4.8% from a year earlier, were competing to sell them.
That’s about seven-tenths of one home per agent, and on top of that, says Real Trends, a Colorado-based research firm, sales commissions are dropping, like they usually do when markets are sizzling.
So let’s recap: More agents chasing fewer homes and making lower commissions. Where do I sign up?
These are all signs that presage a market top. Sort of like buying stocks when the S&P 500
SPX,
is trading for about 42 times earnings (as of Tuesday), but that’s another discussion.
It’s hardly a mystery as to why real estate is surging.
Work-from-home
The first reason is the pandemic, of course, which gave a huge boost to the work-from-home movement. Many people, craving more room, have sought to trade up. This demand, combined with the above-mentioned inventory shortage, has lifted prices.
While working from home is here to stay — 71% of Americans worked from home “all or most of the time” in October, and 54% want to stay home even after the pandemic ends, according to a Pew Research survey — it’s likely to lose some steam as the economy opens up and people return to offices. How many people go back to a “pre-Covid” work environment and at what pace is unclear. But it’s likely to ease demand for bigger homes to some degree.
Raw materials prices surge
The other reason prices are up is the surging price of raw materials. Take lumber, for instance. MarketWatch’s Jacob Passy, for example, reported last week that this has added “tens of thousands of dollars to the price of a newly constructed home.”
In fact, rather than trying to make money in real estate, you’d have been far better off investing in raw materials like lumber, which has shot up from about $360 per thousand board feet to about $1,130 since July, according to CNE Futures data. All told, that helps explain why lumber alone now adds about $24,000 to the cost of a new home, according to Chuck Fowke, the chairman of the National Association of Home Builders.
Why the big jump? The Covid-19 pandemic slowed output at lumber mills, but politics has also been a factor. In 2017, the Trump administration slapped tariffs of up to 24% on imports of Canadian softwood lumber. It’s important here to call tariffs what they are: a tax on the end user. So when tariffs get slapped on lumber, that ultimately winds up contributing to higher house prices. Trump’s Commerce Department lowered the tariffs on softwood lumber to 9% last December. The NAHB’s Fowke calls this a “positive development, but more needs to be done.”
Home builders have been lobbying the Biden administration to eliminate the tariffs completely. The Associated General Contractors of America (AGC), which represents 27,000 companies, sent this letter to the president in February asking him for tariff relief. The AGC’s chief economist, Ken Simonson, tells me that letter has been acknowledged by the administration, but nothing beyond that yet.
But lumber isn’t the only thing that’s causing housing prices to shoot up. The latest Producer Price Index data show the price of metal and metal products at their highest levels in nearly a decade. The reasons are similar to lumber: the pandemic and import tariffs levied by the Trump administration. Like lumber, steel prices have soared: Reuters reports that the benchmark price for hot-rolled steel hasn’t been this high in at least 13 years.
Loss of steel-industry jobs
Of Trump’s steel tariffs, new Commerce Secretary Gina Raimondo says “the data show that those tariffs have been effective.” That’s news to the Coalition of American Metal Manufacturers and Users, which represents 30,000 companies, which has told the Biden administration that there is “scant evidence that the Trump steel and aluminum tariffs have helped the domestic steel industry, as the sector continues to close plants and shed jobs.”
Like the home builders, the coalition has also asked the Biden administration to lift the Trump-era tariffs, which have contributed to a surge in prices. But Executive Director Paul Nathanson tells me he hasn’t gotten any response to a recent letter.
“We’re going to request a meeting with them,” he says.
Metal isn’t as big a cost input for homes as lumber, but for things that go in the house — appliances and, perhaps, a new car in the garage — metal tariffs are being felt.
The administration has proposed a $15,000 homebuyer tax credit — for first-time buyers — but that’s far less than the price hikes that have been caused, in part, by tariffs that it still has yet to lift. Until the president gets rid of tariffs that industry after industry says are backfiring, for many Americans, the dream of owning a home could remain just that — a dream.
