Even as the housing market continues to lead the economic recovery in the United States, home builders, whipsawed by more than a year of dramatic changes fueled by the pandemic, are facing new pressures as they try to meet surging demand.
Already, builders have been scrambling to find enough workers to put up the homes. But now, builders face an acute shortage of raw materials, putting the industry under pressure just to keep up with buyers’ voracious demand.
The squeeze is showing up in builders’ decisions of whether to start new homes at all. In August, housing starts and permits recovered slightly from dips in previous months, with total starts reaching 1.62 million annualized and total permits at 1.73 million, up from 1.55 million and 1.63 million, respectively, in July.
But starts of single-family homes declined for a second consecutive month, at 1.08 million, down from 1.11 million in July, while permits remained unchanged at 1.05 million, according to data released Tuesday from the Commerce Department.
Much of this recent squeeze can be traced to the shortage of raw materials. Everything from steel and piping to gypsum and tiles is in short supply as builders scramble to secure limited supplies and, when they do, pay sharply higher shipping costs. Even lumber, despite a recent decline from its pandemic high, remains volatile and has increased to more than one and a half times what it cost before the pandemic.
And there are signs that these shortages will last longer than many believed even a few months ago.
The home builder Lennar, for example, told investors in its fiscal third quarter earnings call on Monday that supply shortages were forcing it to build fewer homes and that its earnings would be affected.
“During the third quarter, our company and the homebuilding industry as a whole continued to experience unprecedented supply chain challenges which we believe will continue into the foreseeable future,” the company’s executive chairman, Stuart Miller, said.
Lennar is not alone. Pulte, Toll Brothers and D.R. Horton have issued similar warnings, saying that building product shortages are affecting their ability to complete homes, resulting in significant backlogs and extended cycle times across the industry.
In the end, the shortage is forcing builders to adapt in ways that were hard to imagine before the pandemic.
An industry playing catch-up
The gap in inventories has been building for some time. For more than a decade following the Great Recession, new housing starts and permits consistently fell significantly below 1.5 million annualized units, the amount considered necessary to sustain market equilibrium.
It all leaves the industry trying to play catch up. A recent study by realtor.com estimated that the United States was short 5.24 million homes as of June. Despite the shortage, housing starts and permits have not increased at the levels needed to begin to close the housing shortage gap.
Surging shipping costs
Adding to the pressure on builders is the difficulty of obtaining imported goods. Demand for imported goods remains elevated across industries, helping push shipping costs higher. The ports of Los Angeles and Long Beach, California, had an average of about 860,000 inbound containers each month this year, 24 percent more than the typical monthly volume in the five years before the pandemic.
Some of the elevated demand can be traced to panic orders from companies nervous about running out of products; however, acceleration of online shopping has also had an impact.
The high demand for imported goods has caused significant delays in shipping, as logistics companies struggle to keep up with demand. As a result, shipping costs to the U.S. have skyrocketed, with costs from Shanghai reaching eight times their pre-pandemic levels.
Supply chain disruptions are expected to persist, as exporters continue to face disruptions from the spread of the delta variant and pressures from increased demand as the holiday season approaches. These logjams are expected to continue to pressure prices higher.
What is a builder to do?
Even as the easing of lumber prices has created opportunities for homebuilders, shortages and delays of other supplies and materials remain. There are some strategies that builders can pursue to weather this period:
- Manage customer expectations: As a result of the labor and building product constraints, many builders have strategically slowed their home sales pace to more closely align with their current production levels.
- Consider other supply sources: When materials come from foreign sources, builders can be subject to economic shutdowns in other countries and to the higher shipping costs that are resulting from surging consumer demand in the United States. Sourcing goods domestically can offer some relief, even if limited, from these pressures.
The takeaway
Supply chains remain fragile, and uncertainties will persist for the foreseeable future, as the world continues to be affected by the spread of the Covid-19 delta variant. As builders look to increase production of homes, they must manage customer expectations for delivery timelines and new home orders. These shortages will ultimately ease, but until then, a logical first step is to more closely align production goals with the ability to produce.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
