ST. GEORGE — Picture this: You’ve sold a piece of land to a client and agreed to build a home there for a fair price. You’ve signed the contract. But before the house is finished, the cost of materials rises at an unprecedented rate.
What do you do? Do you bite the bullet and finish building the home? Or do you ask the client to pay the difference? That’s the dilemma facing construction companies and contractors building homes in St. George, as well as nationwide.
According to the National Association of Home Builders, the current spike in lumber prices led to what industry insiders are calling a “lumber crisis.” While there are many suspected causes, the National Association of Home Builders blamed escalating lumber prices on insufficient domestic production and severe lumber mill curtailments that lasted well into the 2020 building season.
Last month, Business Insider reported that lumber prices hit a record high of $1,200 per thousand board feet, which adds roughly $36,000 to the cost of a single-family home and $13,000 to multi-family homes. At the time of this report, the cost had jumped to $1,390.
There’s also a shortage of skilled laborers, which means that builders, like Sunwood Homes CEO Bret Howcroft, are feeling the crunch. Sunwood built the Washington City home featured in the video included in this report.
“I’ve been doing this since I was a kid,” Howcroft told St. George News. “My dad started the business when I was 8 years old. Now, after a reboot, I run it.”
In the past, Howcroft said, a market that compelled potential homebuyers to build would have been good for business.
“But what we’ve got now is challenging,” Howcroft said. “If we had inventory that wasn’t pre-sold, we knew it would sell. We don’t have inventory, and our cost cards are constantly going up, so we can’t pre-sell homes anymore, because we could end up losing money.”
Howcroft said that he gets weekly calls from two or three suppliers to notify him that costs are going up. As costs rise, clients may feel like they’re being taken advantage of.
“Which just isn’t the case,” he said. “Costs are rising at an unprecedented rate. Even then, we try to honor pre-existing contracts, or at least meet clients halfway.”
That results in losses, Howcroft said, and they’re not sustainable. Then, as St. George’s population continues to grow exponentially, which means that building more homes would follow, sub-contractors are wrestling with a shortage in skilled laborers.
“This is true of plumbers, electricians and excavators,” Howcroft said. “Demand is rising, and these are good paying jobs.”
Howcroft gave a trusted electrician as an example.
“He’ll hire an apprentice,” Howcroft said, “but the apprentice won’t stay on till he earns his journeyman status. He’ll work for two, three months. Then he’ll just stop showing up.”
This leads to construction delays, as well as increased costs for clients like Justin Hofer. While Hofer has been understanding of the situation, other clients may become suspicious.
“The whole market is volatile right now,” Howcroft said. “It’s not really good for builders or buyers. It’s just too uncertain.”
‘If I could go back in time … I’d have bought 30 homes’
The same uncertainty that wreaks havoc for builders and clients is also what’s driving up prices for existing homes, said Jeremy Larkin, realtor and proprietor of The Larkin Group with Keller Williams Realty. And Larkin is not shy about his recent success.
“I’m doing twice as well as I deserve to be doing,” Larkin told St. George News. “We’re seeing deals every week that are unbelievable.”
Houses are selling for much more than they’re worth, Larkin said, because a perfect storm – appreciation, supply and demand – has descended upon St. George. According to realtor.com, the median list price for a house in Washington County was $399,000, as of March, 2021, up from $299,000 in April of 2018.
“But this thing really started in 2014,” Larkin said. “The 2008 crash was brought about by overbuilding and careless speculation. Since then, we’ve been underbuilding.”
That led to what mortgage lender Freddie Mac called “one of the most important challenges the industry will face.” The U.S., said economists at Freddie Mac, is 3.8 million starter homes short of buyer demand.
“Today, we’ve got the opposite of what happened in 2008,” Larkin said. “We’re undersupplied, and there is no careless speculation. There’s a lot of people who are looking for homes, and they’re not afraid to spend. And this isn’t just in St. George; it’s nationwide.”
That’s why Larkin said he doesn’t believe there’s a bubble. The surplus of buyers, mixed with a shortage of homes and people flocking to St. George means that this market could keep growing well into the future.
But they’re not all former Apple executives,” Larkin said. “They’re married couples moving from San Fernando Valley, for example. A teacher and a mechanic.”
“They bought their home for half a million 15 years ago,” Larkin continued. “Now, for whatever reason, they want to get out of California. When they put their house on the market, it sells for $1.5 million.”
Naturally, Larkin said, when they come to St. George they have more money than they expected. “When they see a St. George house selling for $650,000, they think it’s a deal,” he said.
Larkin, whose company has had a hand in over 1,400 transactions, offered three examples of houses selling for much more than he anticipated. The first is a 3,152 square-foot house located at the Arcadia resort in Santa Clara, Utah. It has five bedrooms, five baths and comes furnished. In 2019, Larkin said it sold for $660,900.
“We sold it again about a month ago,” Larkin said, “for $1.1 million. That’s a difference of half a million dollars in just one year. When I say, ‘Unbelievable,’ I mean it.”
While Larkin said that appreciation should be considered at 1-2%, he attributes the increase to what he calls “mania.”
“People want to move here right now,” he said, “and they’ve got the money to do it.”
Larkin said he sold a new home located in the 300 West block of 400 North in downtown St. George. A three bedroom with two baths, Larkin said he was unsure about how quickly it would sell when he listed it because it shared a small lot with two other homes.
“It was built on an in-fill lot,” he said. “The property owner put three narrow, deep homes on the lot. People say nobody wants this kind of thing because it’s too urban.”
The property sold for $550,000 a scant 24-hours after it was listed for $499,000. This, Larkin said, was proof that market realities shift buyer taste.
“Buyers shift their needs according to what the market has to offer,” he said. “And if we’re going to get prices down as a city, we must do more of this.”
That home, Larkin said, was nothing special.
“But the sale blew my mind,” he said. “A three bedroom, two bath, 1512 square-foot stucco box. In 2017 it sold for $240,000. We sold it April 28 for $405,000. That’s a 60% increase.”
Larkin paused here, retreating into his memory. After a moment, he spoke.
“If I could go back in time, just two, three years … I’d have bought 30 homes,” he said.
The bigger picture
Robert MacFarlane, a team leader at Keller Williams Realty, sold over 200 homes in his first two years with the company. Trained by Larkin, MacFarlane said he spent a lot of time putting signs in yards and driving clients around to see houses.
“But that’s not very rewarding to me,” MacFarlane told St. George News. “I prefer to be more personable with my clients. I like to teach and train. I want to create an environment where people want to work. And I’m obsessed with the market.”
MacFarlane said that the current market is as fascinating and curious as anything he’s ever seen. Because, as he said, it’s market forces that drive home prices, not real estate agents.
“Typically, my agents can help 10 to 15 buyers at a time,” he said. “But they’ve never worked in a market where there’s 15 offers on one home. I’m trying to teach our agents how to handle this, but it’s not easy.”
Bidding wars are also driving prices upward, evidence of a phenomenon MacFarlane calls the “boogeyman.”
“We put a house on the market for $450,000,” MacFarlane said. “Within hours we had an offer for $465,000. We could have closed, but we left it on the market. Before the day was out, we had another offer.”
The second offer was for $500,000, and came with an escalation clause that OK’d the buyer’s agent to go as high as $535,000 should a bidding war ensue.
“It’s like bidding on eBay,” MacFarlane said. “You authorize an amount higher than your bid to try and secure an item in case of a bidding war. But we’re all wondering: Why would a buyer authorize their agent to go $70,000 above asking price?”
MacFarlane calls it the boogeyman, because he imagines buyers discussing their plans with friends, neighbors and agents, and they’re “telling each other scary stories about how they didn’t get the house they wanted.”
“The reality today is very different from when I started just six years ago,” MacFarlane said. “I watch the market every day, and I see people getting swept up in it.”
“But if you look at the bigger picture,” MacFarlane added, “MLS.com indicated that there were actually more homes sold between January and April of this year than there were last. That means there was actually 18% more inventory to choose from.”
It also means that the growth isn’t likely to let up any time soon.
Ed. Note: This is part two of a three-part series, which takes a deeper look at rising housing costs, growth and what the St. George City Council intends to do about it.
In case you missed it, the previous article can be found here.
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