In March, new homes sold at their highest pace since 2006 with sales in the south leading the spike. Low interest rates and greater consumer demand are the driving forces behind the surge, but that’s causing problems with affordability.

Data from the Census Bureau showed sales of new, single-family homes jumped 20.7% to a seasonally adjusted 1.02 million homes exceeding economists’ expectations. They expected only a 14.3% spike. This increase came after sales dropped 16.2 percent to an adjusted 846,000 in February.

New home sales rose in every part of the country except the West where it dropped 30%. The South saw the greatest increase with a 40% spike.

The number of new homes for sale remained the same from February to March. But supply of existing homes is down from 6.5 months a year ago to 2.1 months at the current sales rate because of the surge.

The spike in sales is largely driven by low mortgage rates. At the start of February, the average rate for a 30-year fixed mortgage was 2.79%. By the end of the month, it was 3.27%. With rates dipping below 3% again in April, more people are eager to purchase a new home now since rates are mostly trending upward in 2021.

That is causing prices to skyrocket. With a decreasing supply of existing homes, more people are looking to build. But they are running into another problem – the cost of new construction.

The price of lumber is up 232% since the start of the pandemic last year, and analysts say it could skyrocket even more in the coming months. The problem is lumber supply was already in short supply before the pandemic, and the industry can’t keep up with the new demand for the summer months when more people are building or renovating homes.

While lumber supply is rebounding, limited mill capacity and labor shortages are capping the amount of wood that can be made. For prices to go back down, demand needs to slow — something that won’t be happening for a while.

Freddie Mac estimates there’s a shortage of 4 million homes to meet buyer demand. Year of under-building, millennials being at a point when they can invest in a home, and the pandemic causing people to rethink their living situations are all factors in the growing demand.
And new home construction isn’t waning in the foreseeable future. The number of homes sold that haven’t started construction is up 150% from this time last year. Analysts say the biggest problem in the housing market is inventory, and it shows no sign of easing up any time soon.