Home Sales are UP – Good News!  Home Prices are UP – Not Good News .

Recent news has suggested that the real estate market is generally coming back.  Government supported underwater refinance programs such as the HARP Loans and the FHA Streamline Refinance program, among others, have helped stall foreclosures and short-sales – thus helping with home prices stabilize – and in some instances, rise.

Although foreclosures and short sales still plague some pockets of the housing market, the overall trend is moving north.  Homebuilder stock prices have made some significant gains this past year including companies like Pulte and DR Horton which helps prove that home sales are up and the market is most likely coming back.

However, with the uptick in real estate, homebuilders are starting to feel the pain of rising construction costs such as building materials like gypsum, lumber, and insulation.  Some industry experts say that the rising construction costs could be temporary as manufacturers are dealing with a shortage of materials and staff; however this is expected to decline as the recovery becomes more sustainable.  Coupled with the Fiscal Cliff looming on the horizon, manufacturers are hesitant to ramp up operations.

“The cost of framing lumber, which makes up nearly one-sixth of the total construction cost of a home, has risen 21% in the past year. Makers of drywall, which is used to build interior walls, have boosted prices 25% since January and signaled more increases to come early next year. In addition, builders are paying more for land and labor.” (http://on.wsj.com/V1OFyW)

And, because builders don’t want to hurt their margins, they’re trying to pass this cost on to the consumer.  These actions result in higher home prices and having certain new homes become an elastic product.  Although mortgage loan rates are near historic lows, banks are and other lenders still have their hands tied with strict lending policies.  This, along with the tight lending standards, is another deterrent to new home sales – but not a deal killer.  Once banks can open up their lending standards, I think we’ll see a surge in new home sales.