Falling Material Prices May Be Boon for Single-Family Rentals

By The ArborCrowd Team
Nov 3, 2022

Sky-high prices for some home building materials are falling as for-sale housing demand weakens amid rising interest rates and economic turbulence. This trend, which impacts materials such as lumber and aluminum, may ultimately bode well for single-family rental (SFR) and build-to-rent (BTR) developments.

The Federal Reserve’s aggressive rate hike policy to fight inflation, which has increased its benchmark rates by 300 basis points in seven months, has resulted in average 30-year fixed mortgage rates rising to approximately 7%, severely reducing demand to purchase homes and cooling the housing market. Millennials in particular fear a housing market crash and are choosing to wait until conditions become more favorable.

Mortgage applications declined 69% in the first week of October from the previous year and new single-family home construction starts decreased 14.6% year-over-year in August, according to U.S. Census Bureau data. Home builder confidence was down for the ninth consecutive month in September due to the rising interest rates, building material supply chain disruptions and high home prices, according to the National Association of Home Builders (NAHB).

Demand to remodel homes is also expected to reduce as financing for home equity lines of credit is currently drying up, according to John Burns Real Estate Consulting. The consulting firm explained that remodelers are still booked with projects through the end of this year, but it expects a slowdown to be more evident next year.

One welcomed result of these declines is that some materials for housing construction may have peaked and are reducing in price. Lumber, for example, decreased more than 70% from a 2022 high of over $1,464 per thousand board feet in March to a low of $410 in late September.

Lumber prices have had the most noteworthy swings over the past two years. The COVID-19 pandemic limited production at sawmills, resulting in a shortage of lumber for projects. Prices surged to a record high of nearly $1,700 in 2021 when demand for homes increased while the economy recovered from the pandemic. Prices partially corrected in late 2021, only to soar once again in early 2022 as buyers started stockpiling lumber to avoid a disruption of their supply chains. However, as interest rates have weakened demand in the housing market, demand for lumber is falling again, reducing prices.

Similar to lumber, prices for other materials, such as steel and copper, have fallen from their yearly highs. Aluminum prices have fallen over 40% from its peak this year, although it still remains above pre-pandemic prices.

While construction material costs are starting to fall, the situation is still challenging on the labor side. There continues to be a severe shortage of construction workers in the country for all sectors, including residential construction. The industry’s unemployment rate was 3.4% in September, which is among the lowest level recorded for more than 20 years of available data, according to the U.S. Bureau of Labor Statistics.

Impacts on the Single-Family Rental and Build-to-Rent Market

SFR and BTR communities share the same contractors as the for-sale housing market. The slowdown in for-sale housing forces these contractors to be more competitive in pricing as the pool of work has declined. Additionally, less demand for lumber and other home building materials means those materials can be purchased by SFR and BTR developers at reduced cost.

At a recent industry conference, NAHB’s chief economist, Robert Dietz, said one in 10 new homes (10%) currently being built are rentals, which is far above the historical 3%, according to a GlobeSt article about the event. This number is only expected to increase. In fact, 69,000 build-to-rent homes started construction in the past year ending in the second quarter, a 60% increase from the prior year.

Contrary to the slowdown in demand of for-sale housing, SFR/BTR communities, a subsector of the multifamily space, still has solid demand. People still desire to live in homes, for more space and privacy, and SFR/BTR provides more affordability. These factors coupled with the reduced costs of building materials will only help fuel the growth of the already meteoric rise of the SFR/BTR market.