‘Beyond Historical Highs’: What’s ahead for northern Michigan’s unprecedented housing market

Sky-high materials costs. Severe labor shortages. Massive demand for residential real estate, without the inventory to back it up. Historically low interest rates. An ever-growing need for affordable housing.

These are just a few of the factors that are making 2021 an unprecedented and unpredictable period in northern Michigan’s construction industry – an industry so hot that virtually everyone involved in it is wondering what’s going to happen when the music stops.

The eye of the storm is residential real estate. According to Dennis Pearsall, president of Real Estate One Northwest Michigan Division, the company closed a record $560 million in northern Michigan real estate in 2020 – up from $495 million a year before. With COVID-19 causing an unanticipated spike in remote work, Pearsall says people from all over the country have been buying homes and relocating to northern Michigan.

That influx of buyers is straining a pre-existing inventory shortage in northern Michigan housing … and sparking construction. In addition to selling a lot of houses for a lot of money, Real Estate One Northwest Michigan tracked a 42% increase in the number of vacant lots it sold in 2020, compared to 2019.

“What that says is that – to address the inventory shortage – people are now buying land, and they’re going to build on the land because they can’t find what they want to buy (in this housing market),” Pearsall explained.

The extra demand caused property values to spike for those vacant parcels, too. Pearsall says his team closed 53% more dollar volume in vacant real estate in 2020 than in 2019, outpacing the increase in individual units sold.

Land isn’t the only thing buyers will be paying extra for if they choose to build in 2021. From residential to commercial and beyond, every facet of the construction industry is also facing increases in two other key categories: materials and labor.

According to Associated General Contractors of America (AGC), most material costs have increased significantly. For February 2021, lumber and plywood costs were up 56% year-over-year, with double-digit increases also hitting copper and brass mill shapes (30.9%), steel mill products (20%), steel pipe and tube (10.1%) and more.

In total costs, AGC estimates that commercial structures cost 7.9% more to build today than they did a year ago. And the hikes are even bigger for residential construction: 11.2% for single-family, 12.4% for multifamily.

Mike Tucker

“The average home probably costs $20,000 to $25,000 more to frame this year (just in lumber costs) than it did this time last year,” said Mike Tucker, president of Kingsley Lumber & Hardware. “That’s pretty substantial. Somebody has to pay that bill, and ultimately, it’s the new homeowners that are paying more for these houses.”

Framing is just part of the equation. Tucker also points to oriented strand board (OSB) as an area where builders are paying a premium just to keep building houses. OSB is commonly used for sub-flooring, wall sheathing, roof sheathing and more – which means a lot of it gets used in the average house.

“The price (for OSB) has not stopped going up,” Tucker said. “We’re beyond historical highs. For me, a sheet of OSB that was $8 last year is coming in around $30 this year. When you need several hundred of those to build your house, that’s a big deal.”

For now, Tucker says the market is bearing those prices. In residential real estate, the demand throughout the market is driving building activity even as building a house becomes more expensive than ever before. For CMB Construction, a custom home building company that services much of the northern Michigan area, business has rarely been faster-paced.

A new build by CMB Construction in Traverse City.

“There’s a strong residential home building market right now,” said Colin Bushong, owner of CMB Construction. “It’s been busy for probably the past five years, but the last year or two have really escalated in intensity. I’m receiving quite a few calls every day with people inquiring about new construction and the costs.”

Once upon a time, Bushong and his team took on home renovation projects to supplement new construction work. Renovations are booming at the moment, too. In 2020, the home remodeling site Houzz tracked a 58% year-over-year increase in project leads for home renovation professionals. While CMB Construction gets multiple renovation inquiries nearly every day, Bushong says the company hasn’t taken on that type of work “probably in the past three or four years.”

The bustling new build market is the reason. Bushong says it used to be “abnormal” for him to be working on a new home estimate for more than one prospective client at a time. When the TCBN spoke with him, Bushong had four estimates in the works, with more calls pouring in daily. With the bandwidth to take on up to five projects at once – and with most of those projects taking 12 months, particularly with COVID-era slowdowns in materials and appliance sourcing – CMB Construction is already booked out a year and a half.

Despite his worries about materials costs “squelching” the wild demand for new builds, Bushong has only seen one or two would-be clients walk away over high-cost estimates. Buyers register shock at the prices, but then they agree to pay them.

When will materials costs go back down again? No one knows the answer. 2020, between mill closures, wildfires out west, and uncertainty sparked by COVID-19, brought a perfect storm of factors to increase lumber prices. A year later those prices are still hovering at record highs, with no signs of dropping. According to Tucker, that’s because things in the materials production industry haven’t gone back to normal, even as the country looks ahead to widespread vaccination and post-pandemic life.

As an example, Tucker pointed to Lumbermen’s, his interior door supplier. Last month, a COVID-based, 10-day shutdown shut the large supplier down.

“It’s a big business: We’re talking hundreds of thousands – if not millions of dollars – worth of doors a month coming out of this plant. Even 10 days of shutdown sends a ripple that takes months to fix,” he said. “When they come back to work, they’re over a week behind, and there’s really no way to catch up because they were already running at full capacity.”

Tucker says many lumber mills are in similar situations: running at full tilt since coming out of last spring’s COVID shutdowns but still running behind. As a result, there is no excess inventory of virtually any lumber product that the construction industry uses – which is creating scarcity, keeping prices high, and creating to supply chain issues that cause delays in materials sourcing.

Tucker notes other problems too – not enough truck drivers to move the product that is being made and not enough specialty resins coming in from oversees to manufacture sufficient OSB – but COVID-related delays remain the biggest problem in the supply chain.

Just as logistics and freight firms are having trouble finding enough people to drive their trucks, construction companies are facing their own challenges with labor. Those hurdles aren’t new. Bushong notes that labor shortages have been a fact of life for businesses like his for the past three to five years.

The state of the residential building market means that builders could theoretically expand their teams to take on more work, but they’re instead fighting to keep the teams they already have because of top-dollar wage demands and a tight labor market.

“You keep your networks tight (with the team you trust), because going outside your network, you never know what you’re going to get,” he said. “Your team is your strength right now, because getting new people isn’t a very likely scenario.”

As president of the board of directors for the Home Builders Association Grand Traverse Area, Tucker says he’s trying to do his part in building up the labor force from the ground up. The organization has been working on initiatives for several years to encourage and sponsor teens thinking about careers in the skilled trades.

While those efforts will hopefully bear fruit in the future, they’re seeds in the ground now, as opposed to full-grown trees. As a result, Tucker says builders in the area are either making do with the labor they have or bringing in workers from abroad.

“What you’ll see on some of these larger commercial projects – some of the roofing crews, the drywall crews – what you’re noticing for the first time ever (in the region) is Hispanic labor,” Tucker explained. “And that’s not because (the builders) want to undercut the price – because trust me, I’ve seen the price, they charge the same amount – but it’s because there’s no other solution.”

The crews come in from big metropolitan areas – St. Louis; Indianapolis; Raleigh, North Carolina – and they’re coming here because “we have the perfect storm,” Tucker said.

“Huge, huge amounts of demand, not enough labor,” he said. “And so these guys can command top dollar.”

The current market dynamics could pose challenges for filling one of northern Michigan’s starkest needs: affordable housing. Yarrow Brown serves as executive director for Housing North, an advocacy organization dedicated to building awareness, policy, and capacity for housing solutions across a 10-county northern Michigan radius.

Brown sees housing and long-term pandemic recovery as being inextricably linked, but worries that the region isn’t keeping pace with its necessary housing inventory growth in general – let alone with the need for affordable housing solutions.

“Because we have seen how much businesses depend on the availability and affordability of housing for workers, we know that our economic recovery will depend on homes,” Brown said, citing a 2019 study between Housing North and Networks Northwest that determined a demand for 10,880 rentals and 4,660 home ownership units over the next five years in the 10-county region.

“That equates to about 3,100 units per year, on average, to house those currently living and working in our region or those who would move here,” Brown added.

Housing North estimates that about 1,000 units were built in the area in 2019, and that at least 1,000 more are currently in progress. The organization is still gathering data on number of units built in 2020. Regardless of 2020’s figures, though, the numbers appear to be lagging behind the need, which could mean continued problems with inventory and affordability.

The current real estate market dynamics could spell trouble for more than just affordable housing, too.

“Prices can’t go up forever,” Tucker said. “There has to be a day of reckoning. And the more things go up without that reckoning, the more it starts to look like a bubble.”

He equates northern Michigan’s housing  market to other bubbles.

“If you look at how other real estate bubbles, or internet bubbles, or any of the other economic booms that resulted in a bubble happened, it looks a lot like what’s happening right now, here,” he said. “If I’d had a crystal ball in 2007, I probably could have said the same thing, but I didn’t, because I didn’t recognize it then. I’m recognizing it now.”

The biggest risk? Tucker points to interest rates, which have been historically low since early in the pandemic. Those low interest rates mean the average home buyer can afford a more expensive house than they could with even slightly higher rates. The construction market is responding by building more homes in those slightly higher price ranges. When the interest rates go up, they could create a chain reaction that causes something akin to a bubble burst.

“Everyone looks at (the market) and says, ‘I can afford $200,000 house or a $400,000 house,’ but they really mean ‘I can afford a $2,000 payment,’” Tucker explained. “That’s all well and good … until the interest rates go up one percent. Now, it costs $440 more a month for the same house, and that suddenly knocks a bunch of buyers out of that pool.”

As rates rise and the big “Ds” take place – death, divorce, disagreements, debt – Tucker says he believes there will be dark times ahead.

“That is the beginning of the circle of a foreclosure crisis, and that’s part of what happened in 2007 and 2008,” he said. “A lot of the warning signs that we saw then, we’re seeing now.”