Home Builders Prevail Despite Supply Shortages and Increased Costs

Against all odds, new homes remain in high demand

By Yvonne Nguyen

What comes up must come down; and yet, rising mortgage rates have yet to reach their peak to start their decline. As tight inventory and high mortgage rates price out buyers, the US housing market continues to defy all expectations and continues to burn. 

Despite a housing shortage, a supply shortage and historically high mortgage rates, the home building industry prevails against all odds. The switch in focus from single family homes to multi-family units makes all the difference when it comes to keeping builders booked and busy.  

Switching Gears

As threats of a housing bubble loom, all eyes are on the housing market. Inflation and rising mortgage rates have wreaked havoc on the housing market in recent months with mortgage rates reaching a 12-year high and showing no signs of slowing down. 

Single family buyers are continually being edged out of the market as increased demand continues to drive up home prices. The surge in pricing combined with supply shortages in all facets from raw materials to skilled labor are leaving first time home buyers even more hesitant to purchase a house than in the years prior. 

Even faced with supply shortages and increased construction costs, new home constructions are still on the rise.

According to the National Association of Home Builders (NAHB) Housing Trends Report, the share of prospective buyers has fallen for two consecutive quarters — from 65% in the third quarter of 2021 to 60% in the first quarter of 2022 — to roughly pre-pandemic levels. Overall, the share of adults planning to purchase a home fell for a third straight quarter.  

As a result, home builders are shifting away from single family buyers and focusing on multi-family buyers and rental investors. Home builders are able to turn a profit quicker when selling to investors. With inflation and historically high mortgage rates, individual buyers are challenged by inflated prices on houses, as well as high monthly mortgage payments, whereas investors have the cash flow to secure properties upfront.

Even faced with supply shortages and increased construction costs, new home constructions are still on the rise. In a study by Reuters, housing completions for single family units plunged in the last year, while multi-family unit completion surged. Not only that, but fewer building permits for single family homes were approved recently compared to the last few years, while building permits for housing projects with upwards of five units increased significantly. 

Construction Costs on the Rise 

Despite the fact that lumber prices are slowly decreasing and materials becoming more widely available, construction costs continue to surge and additional time is needed for projects to be completed. In some cases, builders are beginning to stockpile materials to avoid supply chain issues and having to find alternate shipping routes halfway through a project. 

In a CNBC report, NAHB Chairman Chuck Fowke explains, “higher material costs and lack of availability are adding weeks to typical single-family construction times. NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2020.” 

Since the start of 2022, building materials have jumped 8% in price. The uptick in demand for houses is placing added pressure on a supply chain that had not fully recovered from the effects of the pandemic, be it a shortage of workers or conflict with transportation. Supply constraints coupled with fluctuating material prices and unpredictable shipping costs are leaving builders with longer project times and erratic pricing.

Material shortages continue to plague homebuilders across the board – tight inventory is not limited to just lumber or concrete. Things like cabinet doors, sinks, ranges and windows are difficult to come by. Not only is inventory limited, but prices are constantly fluctuating. Home builders are now adapting to a new way to build houses, with the timeline dictated by supply availability and pricing rather than a more traditional approach.

Despite the fact that mortgage and inflation rates have not yet peaked and supplies are still limited, the new-home construction industry remains dynamic. The backlog of improved home building projects are at an all time high, and demand for new houses doesn’t seem to be slowing down in the foreseeable future. Housing is critical to the overall health of the economy and with such a hot market, it is a major concern that a recession is imminent, but an economic and housing outlook report from Fannie Mae assures us that though demand for new homes will continue to outpace supply for the foreseeable future, a strong housing market could be what prevents us from a major recession.

Yvonne Nguyen is the Assistant Editor of Builder and Developer. She can be reached at yvonne@builder.media.

Leave a Reply