Cost of lumber and materials disrupts Savannah's homebuilding and real estate market

For the past year, the price of home building materials, particularly lumber, has climbed to record highs, disrupting construction and delaying buyers or pricing them out entirely. A combination of staffing shortages at lumber mills and continued demand is the culprit, according to area builders.

The price of lumber, which historically stands at $300 per thousand board feet, reached a peak of $1,607 this May. Though that number has since decreased to around $600, that's still double pre-pandemic numbers.

Rutherford, who was drafting up plans for her own house on the south end of Tybee Island, said construction costs tripled in less than a year, effectively putting her plans on pause.

"It became unrealistic to build the home that I truly wanted," said Rutherford, who was hoping to fashion a space to raise a family. "I'm predicting it will be five years before building."

She's just one of the many homebuyers choosing to wait it out, according to local builders and national trends, which shows a 9.5% decrease in housing production.

"Despite favorable interest rates, there's definitely a lot of folks waiting on the sidelines," said Matthew Johns, a local builder.

Usually, he said, three fourths of his clients are actively moving to construction after purchasing property, but now "those numbers are probably flipped."

"New construction is always a premium, but it's reached a point beyond where most people can justify at this point," said Johns.

Cost of materials price out homebuyers

Another crucial material adding to the already soaring costs is oriented strand board (OSB) — compressed wood chip boards used for sheathing for walls, floors and roofs — the price of which increased seven-fold in the past year and continues to climb even as lumber falls, according to Bloomberg.

Copper wire has also gone through the roof, said Jerry Konter, vice chairman of the National Association of Home Builders (NAHB), who also oversees builders in Savannah.

But while other inputs may have increased about 10% to 15%, lumber and OSB remain the outliers, said Konter.

"When lumber peaked nationwide, on the median size of a house of $300,000, it added as much as $36,000 to the cost of the house," said Konter, "and that's just purely based on lumber."

According to a 2021 NAHB study, every $1,000 increase prices out 191 households in the Savannah area. The income needed to qualify for a median home price of $309,020 is $70,810.

"You're pricing out a certain economic group," said Matthew Byrd, president of the Home Builders Association of Greater Savannah, "those are first-time homebuyers, people that have rented a long time and were working on their credit and the general workforce."

Byrd points out the multiple economic development projects, such as the industrial park in Effingham County, the Amazon facility in Pooler and the North Bryan County development approved in May that is meant to bring in more workers.

"When you add on, you know, $25,000 or $35,000 onto a house, that's going to price out a lot of the people that are going to fill those positions and jobs," said Byrd.

Strain on the homebuilding industry

Ultimately, the costs all gets passed down to the consumer, said Konter, but right now builders are also suffering because some haven't been raising prices as fast as input costs have gone up.

"If you had written a contract and then three months later, you're framing the house, you're incurring $15,000 to $30,000 additional costs than you had contracted for," Konter explained.

If you add $36,000 to a $300,000 house, that's more than 10%. According to Konter, most builders work on about a 15% gross profit margin. He says his margins have been reduced by 5% to 6%, which caused him to temporarily halt selling.

"We've got a limited lot supply and the only thing you've got down the road to guarantee success is your lot inventory," said Konter.

In some cases, builders have had to pause building in the middle of construction, either due to dropped contracts or delivery delays, leaving up framed houses for an uncertain period of time.

The wild unpredictability has caused more home builders than ever to add a pricing clause or escalation clause to their contracts, said Meagan Mowry of Integrity Real Estate.

The terms of the clause is negotiated between builders and buyers, giving both sides protection on incurring costs and options to terminate the contract.

"This is the first time in my career, that all of these builders are having to use a pricing clause, because, for a while there, costs were a runaway freight train," said Mowry who has worked in real estate for 17 years.

A broader look

But contrary to all of the evidence, building has not slowed down overall as much as one would think, said local realtors and builders. That's because demand, for the most part, is outrunning supply.

"People from large metropolitan areas like New York, New Jersey and California...have chosen, now that their job has gone remote, to relocate to the area," said Mowry.

Those who can afford, will buy. She says builders, for the most part, have been able to recapture lost profit margins through higher pricing, higher volume or both.

"But the person who hasn't been able to recover and is maybe suffering the most is that first-time buyer from the Savannah area," she said.

The trickle down effect is also severe.

"What happens when you can't afford to buy a house? You rent," said Konter, "the increase in the multi-family market, ultimately translates to rental rates and that puts great stress on affordable housing. Whether it's rental or it's for sale, we have an affordability crisis right now."

Nancy Guan is the general assignment reporter covering Chatham County municipalities. Reach her at nguan@gannett.com or on Twitter @nancyguann.

This article originally appeared on Savannah Morning News: Cost of lumber and materials disrupts Savannah's homebuilding and real estate market