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Prices may be climbing, but demand for new homes is keeping pace

Across the country, housing market conditions are “unlike anything the industry has ever seen.” Buyers are undeterred. The story behind how the local housing market is plowing ahead despite national challenges.

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New home construction continues at a rapid pace just west of Fargo Davies High School in south Fargo.
David Samson / The Forum
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FARGO — Families hoping to build their dream home over the past few years have likely encountered some unpleasant surprises.

Thanks in part to construction material cost increases, in both the metro area and across the country, building a new home has come with an inflated price tag.

David Reid, president of both Radiant Homes and the Home Builders Association of Fargo-Moorhead , is a 13-year veteran of the construction industry. The current state of the home-building market is “certainly unlike anything I’ve ever seen,” Reid said. “Even according to national statistics and anecdotally from builders who have been doing this for 30 or 40 years, it’s unlike anything the industry has ever seen.”

Asked if the current market is the most turbulent he’s encountered, Reid shared a sentiment relatable to virtually everyone since the onset of the COVID-19 pandemic. “It’s been a wild ride over the last couple years,” he summarized.

Trying to take the heat off

Hearing Reid account for the sudden increase in home-building costs calls to mind an Economics 101 course. Demand for new home construction is outpacing the supply of building materials and prices are rising accordingly.

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Through interest rate increases, Reid said the federal government is trying to “engineer a soft landing” for the economy. Specifically, what that means for the home-building industry is the federal government is attempting to decrease demand for new home construction. “Obviously, the hope is that as demand tapers off, the industry will regulate and bring some of these material costs back down,” he explained.

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David Reid is the president of Radiant Homes as well as the Home Builders Association of Fargo-Moorhead.
David Samson/The Forum

Thus far, the only building component that’s felt the effects of the soft landing has been lumber. Prior to the pandemic, costs for random-length lumber hovered around $400. A brief drop followed at the beginning of the pandemic, but prices shot up throughout 2020 and remained “volatile” through 2021, approaching $1,700, Reid remarked.

Lumber prices have continued declining since another spike in March, but the damage to consumers' wallets had already been done. From April 2020 to July 2022, the National Association of Home Builders estimates that lumber volatility alone added over $14,000 to the price-tag for an average single-family home.

For Radiant Homes, lumber is the only area where Reid has seen prices come down, however.

Costs for materials like steel, fiberglass, PVC, plastic, copper, nickel, aluminum and concrete have kept rising, Reid added. “Everything else besides lumber, we’ve seen steady and drastic increases,” Reid said. “Pretty much every input in the construction process has seen drastic pricing increases and frequent price increases to the extent that we just weren’t sure when these price increases were going to stop.”

The result? Contractors and clients alike are “exhausted” and “fed up” with the frequency and dollar values of these impossible-to-predict increases, Reid said.

Here to stay

These challenging market conditions may unfortunately stick around for the foreseeable future, Reid predicted.

As demand has cooled, he pointed to recent reports that new construction costs are beginning to decline, a sign that price increases may be reaching their end. That will allow manufacturers to catch their breath, but it’s no guarantee that prices will fall back to pre-pandemic levels. “It seems like there is a likelihood that material prices aren’t going to come down the same way they shot up,” Reid cautioned.

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Another negative indicator for the housing market is that the NAHB’s Housing Affordability Index reached its lowest level since the Great Recession in July. All told, housing is becoming “unattainable” for many buyers, Reid described, hence the push to create a soft landing for the economy.

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New home construction continues at a rapid pace just west of Fargo Davies High School in south Fargo.
David Samson/The Forum

Those efforts may have ultimately done more harm than good. Relatively high interest rates coupled with already sky-high construction costs has given consumers pause. “That’s going to cause buyers to really hold off,” Reid said. “It’s going to price a lot of people out of the market and wait for the market to cool off, which seems like it’s certainly doing.”

Historically, today’s interest rates are still considered low, but the extreme lows of 2020 and 2021 may not return soon. “There’s no indication that interest rates are going to come back down to 3% or below 3% like we hit this all-time low in 2020 and 2021,” Reid said. “I think buyers are coming to grips with the fact that we’re probably in a new normal and that we’re going to see these construction material prices and we’re going to see these interest rates for the foreseeable future.”

‘That’s just the business’

For Tyrone Leslie, president and CEO of Fargo’s Heritage Homes, dealing with price increases is just a part of his job.

Born and raised in Winnipeg, Leslie previously worked for western Canada’s second-largest home-building firm. All told, he has 34 years of construction and real estate experience under his belt, so dealing with today’s adversity is nothing new to him. “That just happens,” Leslie said, discussing the state of the market. “Every year, you get increases, and certainly in markets like this where there’s more demand, you are going to certainly see additional costs.”

Cost fluctuations aren’t isolated to the housing market, either, Leslie pointed out. “As you get one coming down, another one is going up. That’s just the business,” he said. “Whether you’re buying a new home, buying a car or anything else of that nature, you’re going to see costs go up and down.”

In total, Leslie projects his company will build roughly 60 houses this year at a cost of $34 million. That’s on pace with previous years and a reflection of his commitment to adjust to whatever the economy throws their way. “You need to make sure you audible your company and make sure you’re keeping ahead of the times to make sure your clients don’t feel the brunt of it,” he said. “The reality is, it’s a different market, so we have to adjust and we will.”

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Advice for prospective home-buyers

Considering buying or building a home but don’t know how to interpret the market? David Reid, president of Radiant Homes and the Home Builders Association of Fargo-Moorhead, offered the following advice.

  1. Talk to your financial advisor and your lender. “It’s such a personal financial decision to make this investment in a new home,” Reid elaborated. “It’s oftentimes the largest investment somebody is going to make.”
  2. Evaluate market conditions and decide if it’s right for you. Buyers can also take solace in knowing that the lending environment has changed dramatically since the bubble burst in 2008. “(Lenders are) really looking out for their clients and they don’t want them to get into a home that they ultimately can’t afford or get upside down on,” Reid said.
  3. Look out for other financing arrangements such as adjustable-rate mortgages , which allow buyers to stay competitive on interest rates. Other local incentives are available as well, such as the two-year tax abatement available in Cass County. “There are still good incentives out there and good reasons why it may be a good time for you to build a home,” Reid said.
Related Topics: HOUSINGREAL ESTATEECONOMY
Thomas Evanella is a reporter for The Forum. He's worked for The Forum for over three years, primarily reporting on business news. He's also the host of the InForum Business Beat podcast, which can be streamed at InForum.com/podcasts or wherever you listen to your podcasts. Reach him at tevanella@forumcomm.com or by calling 701-241-5518. Follow him on Twitter @ThomasEvanella.
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