How the Pandemic Has Affected the Construction Industry -- And Why Now is the Right Time to Build Your Custom Home
When hiring a professional team, building your custom home is not only possible but ideal -- even in 2021.
We have seen an enduring progressive decline of many industries and microeconomics during the COVID-19 pandemic. These have emerged particularly in those industries and positions unable to transition to remote work. However, the construction industry has experienced a significant, persistent boom throughout the crisis. This surge in construction has occurred primarily in the residential space rather than the commercial space. This pivot makes sense given an en masse turn towards working from home instead of from off-site commercial offices. Across the country, Americans have decided to invest more in their at-home environment. They have chosen to relocate to regions with lower costs of living, larger properties and lesser costs-per-square-foot. With this growing, trans-national desire to adopt an indoor-outdoor lifestyle -- separated from multi-hour commutes and exhausting urban pursuits -- has emerged a need for fast, effective and all-encompassing residential design and construction. Interest rates have plummeted at the direction of the Fed while the cost of homes has increased nationwide. The combination of low interest rates and low inventory of homes has created a sellers’ market. This has encouraged sellers to hike up prices for built properties. At the same time, buyers have been emboldened by lower interest rates and have continued to compete for sales. Because of this heavy competition for built properties -- i.e. those hosting a livable structure -- building on undeveloped land has become more financially feasible. This has unexpectedly and exponentially spurred activity in the construction industry during COVID-19. Follow below to learn more about how the pandemic has affected the construction industry in 2020. We will also discuss why now is the right time to build your custom home, no matter where you live. Furthermore, we will outline
what to expect of the construction industry in 2021. Lastly, we will answer when to consider a construction loan and what to expect when building your custom home from scratch.
How the COVID-19 Pandemic Has Affected the Construction Industry Nationwide
Sellers and buyers alike -- both of residential real estate and commercial real estate -- have wondered how the construction industry has fared over the last couple years.
Renovations and remodels have not been considered essential during the pandemic. In fact, many construction, remodel and renovation projects stalled during the first months of the pandemic. Dima Williams explains in her article “Construction Halts Grow, Straining Both Housing And Financing Markets” for Forbes -- composed back in April 2020. Though global supply chains, initial essential worker classification lists and disbursements stalled during the first quarter of the pandemic, the industry has since rebounded. In many states across the US, general construction was later considered an essential business during the COVID-19 pandemic. This was particularly so as it related to ADUs and solutions for the growing housing crisis. Even stricter states like California and Illinois considered both commercial and residential construction to be essential. Sarah Chaney Cambdon explains in her article “Blue-Collar Jobs Boom as Covid-19 Boosts Housing, E-Commerce Demand“ for The Wall Street Journal.
Camden writes that -- shockingly -- “nationally, employment in residential construction...now exceeds pre-pandemic levels.” Sarah Camden quotes David Berson -- who is the chief economist at Nationwide Mutual Insurance Co. Cambdon writes that employers like contractors and prospective homeowners will “‘continue to see great strength in demand." They will see "the demand in the construction area [most] in housing.’” Industries like construction were “hard hit by previous recessions." However, "many economists and companies expect [such] jobs to continue growing” after we contain the virus. The primary reason for this steep pickup is the “buoyant housing market.” The residential real estate market is expected to expand even further as more continue to work remotely in the long-term. Experts expect consumers to continue to engage with the market, reinvigorating a
sluggish macro economy. As vaccines roll-out to the masses -- particularly amongst young families and emerging career professionals -- even more construction projects are expected.
What is Force Majeure and What Does it Have to Do with the Construction Industry and the Pandemic?
"Force Majeure" often applies to construction and other contracts in the event of an unforeseen disaster or "act of God."
One significant concern held by construction industry companies, contractors, sub-contractors, designers, prospective homebuyers and homeowners alike during the COVID-19 pandemic has remained. This concern has been the cancellation of contracts due to force majeure. Faye Moore explained the force majeure concept in her article “Will Covid-19 trigger a force majeure clause?” for Investopedia in early 2020. Faye Moore explains that force majeure can be called “an act of God." The term refers to “contractual clauses which alter parties' obligations...under a contract when an extraordinary event or circumstance beyond their control" occurs. The exception may be taken when this event "prevents one or all of them from fulfilling those obligations.” Moore writes that “events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics” fall under force majeure. They are often considered events which may trigger the enactment of a force majeure clause of a contract.
Did Force Majeure Exceptions Result in Canceled Construction Contracts in 2020?
Both construction industry companies and their clients would have been legally able to claim the force majeure exception to their contracts during the pandemic. However, few chose to do so. In fact -- according to the 21 January 2021 Washington Post article “U.S. home construction reaches 14-year high in December” -- “U.S. home construction jumped 5.8 percent in December to 1.67 million units, a 14-year high that topped the strongest annual showing from the country’s builders in 15 years.” The article notes that “housing has been one of the star performers in the past 12 months." This has been so "even as the overall
economy has been wracked by the spread of the coronavirus.” Both “record-low mortgage rates and the migration of Americans to larger homes better suited for home offices during the pandemic has fueled demand.” The Western, Midwestern and Southern regions of the US all experienced surges. According to The Washington Post, “construction rose 13.6
percent in the Midwest, 11.2 percent in the West and 1.3 percent in the South.”
What to Expect of the Construction Industry in 2021 Homeowners and contractors alike can expect a robust construction industry in 2021, with an increase in projects across the next couple quarters nationwide.
In 2021, the US government continues various attempts to spark a robust resurgence of the national economy. For instance, the Fed has reduced interest rates. This has made it easier to secure not only mortgage loans but also mortgage construction loans and FHA loans. Construction loans can be more expensive in the short-term -- due to higher average interest rates than those of traditional mortgages. However, the payoff in terms of lifestyle and personalization can be huge. This is especially true when one considers potential renovation loans one might need to apply for. One must also consider how they will secure and pay back loans in order to retrofit one’s preowned home into one’s customized dream home. According to Maurie Backman in the Nasdaq article “Today's Mortgage Rates -- March 9, 2021” “the average 20-year mortgage rate today is 2.827%.” The average interest rate for construction loans hovers much higher -- around 4.5%. However, the competition between buyers has pushed the buying price of homes around the country far above the preexisting market price. This has the effect of reducing the influence of low interest rates on overall expenditure.
Why You Might Consider a Construction Loan to Build Your Custom Home Today
Some delays in construction completion have occurred due to COVID-19. Despite this, many states have allowed such processes to continue as long as social-distancing and masking requirements are followed by the construction industry. In her article “Home Construction
Loans Explained” for Time, Taylor Moore outlines why building your custom home with a loan might be worth it. Moore writes that “building from scratch can let you skip some hang-ups of a previously occupied residence." These include things "like termites, water damage, unintuitive room layouts, or disastrous wallpaper.” Construction loans are currently very popular because they allow a start-to-finish, fully-customized home building experience. Furthermore, the cost of the build is paid out over the course of a traditional mortgage.
Moore explains that “a home construction loan is a short-term, high-interest loan that finances the costs of building a new home." This includes everything from land acquisition to design and construction. The overall cost can be mitigated by purchasing the land, securing permitting and choosing a space with appropriate zoning. Taylor Moore continues to explain that “after the home is constructed, you need to either pay off the loan." Homeowners also have the option to "fold the amount borrowed into a traditional mortgage, either with the same lender or a different one.” Construction loans “generally cover the costs of land (unless you already own it), labor, materials, closing costs, and permits.” This allows prospective homeowners to embark on a full-scale home design and construction process. They can do so with all aspects of the project covered by an existing source of funding. This amount is then paid in full over the course of a traditional mortgage.
What to Consider When Building Your Custom Home from Scratch
Building your custom home from scratch allows you to personalize your home to your lifestyle and preferences in every space -- both inside and out.
There are a few elements to consider when building one’s custom home from scratch. Cost of land, materials and labor will all factor in. The prospective timeline -- some of which have been prolonged during the COVID-19 pandemic -- and materials and labor shortages should also be considered. Difficulty in securing, processing and shipping building materials has remained a concern. This has been so even as the pandemic has begun to slow and perhaps even come to a close. However, there are ways to circumvent this issue. Opting for local building materials and local labor can both limit overall costs during your construction project.
Supply chains are expected to soon return to normal. During this time period, the housing market is expected to slow -- transitioning from a tilted sellers’ market to a buyers’ market. As such, construction material prices will likely drop somewhat. In fact, some construction experts expect the price of lumber, steel and other materials to stabilize in the summer
months of 2021. During this period, experts anticipate interest rates to remain largely the same. This combination will likely increase incentivization towards building custom homes on existing land rather than purchasing pre-built structures.
Why Building a Custom Home is the Perfect Solution for Remote Work Building a custom home from scratch allows recent remote workers to create the perfect home office in their house -- which many pre-built residences on the market today lack.
Alongside countless economists, writer Emily Courtney of FlexJobs has noted the prevalence of remote workers during the COVID-19 pandemic. She recently outlined the likelihood that many will continue to work from home after the crisis has subsided. Courtney writes in her December 2021 article “Remote Work Statistics,” that “according to Upwork, 41.8% of the American workforce continues to work remotely." She continues on to note that “an estimated 26.7% will still be working from home through 2021 [and] 36.2 million Americans (22% of the workforce) will be working remotely by 2025.” This number might not seem shocking given the seismic cultural shift experienced by the US labor force in 2020.
However, “this is a staggering 87% increase from the number of remote workers prior to the pandemic.”
Americans Are Investing More in Personalizing Their Homes
To understand the current market, one must mentally couple the ability to work remotely from anywhere with a changing understanding of work-life balance. Given this, custom homes have become much more attractive and achievable to many demographics. Both first-time homebuyers and retirees have been attracted to the option of building from the ground up based on their specific lifestyles and desires. Furthermore, interiors trends like eclecticism and maximalism have begun to outpace minimalism for the first time in a decade. This has served to further prove the importance to homeowners of personalization. Real estate and investing experts back this up. Kendall Little elaborates in her article “This Is What Home Buyers Want Most in 2021” for Time. Little writes the customization was a huge trend for both current homeowners and prospective homeowners in 2020. She notes that “according to the 2019 State of Home Spending Report, Americans spent an average $7,560 on home improvement in 2018." This was "a 17% increase from the previous year.” Another survey found that "average household spending on home services in the U.S. rose to $13,138 in 2020, a $4,000 increase year-over-year."
Working with a Practiced Design Team Will Get You What You Really Want
Creating a custom-built home from the ground-up allows homeowners to choose the team they work with, the layout they love and the finishes that work for them. Unlike purchasing a model home or a previously owned house, going the custom route permits homeowners to make all design and execution decisions. Furthermore -- if they choose well -- homeowners are assisted throughout each design and build step in the process by a quality, practiced team. For instance, Element offers prospective homeowners years of experience and design knowledge. Element’s in-house design team performs an exhaustive cost analysis for the entire project, providing homeowners with a realistic timeline and cost expectation for each step of the process. Working hand-in-hand with the prospective homeowner ensures that Element’s team understands and respects both cost and time budgets outlined by the client. Because Element is a full-service design firm with years of inter-industry experience and industry-leading technology, the team is able to offer unparalleled access to the client regarding the project’s planning, development and execution. Element agrees to all pricing upfront and each contract’s LD -- “liquidated damages” -- clause offers clients an extra level of protection and assurance, guaranteeing that the team meets all project deadlines.
From start to finish, the client can choose all appliances and architectural details, the floor plan, landscaping and storage. One is able to pick out what is best suited to one’s family and lifestyle. Though cost per square foot can be a bit higher with a custom build than with a traditional model or pre-built home at $300 to $400/square foot, the cost per square foot may decrease depending on size, finishes, custom work and appropriate lot type and location. Regardless of cost, each client who chooses to create a custom-built home with Element receives a completely personalized, turn-key space they can both immediately move into and happily live in for years to come. All in all -- with each element considered -- a custom home is often a much better option than a pre-built home.
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