Both locally and nationally, the housing and construction industry has been experiencing unprecedented inflation in pricing. You’ve probably seen the memes all over social media (“Take me somewhere expensive” – as the couple sits for dinner down the row of lumber), and we certainly hear the sticker shock daily from customers.
So today, we wanted to take a few minutes to dive into why we’re at the place we’re in and explain the current market. To begin, below is an example of the cost of material for a home in 2019, 2020, and currently in 2021. Of course, every home is different, but this is a reasonable model for our purposes. The chart shows both the total cost of materials and the individual segments, with a couple of important absences that we’ll discuss later.
The overall cost of materials for a home saw a decent increase of about 16% from 2019 to 2020. The most significant percentage jumps were in Appliances (31%), Trim & Cabinets (27%), and Trusses (16%).
There were two significant factors at play here:
Difficulty sourcing materials, often from overseas
Lack of labor in factories to produce the finished goods
The first effect on the supply chain from COVID was in overseas goods. Many factories simply shut down or couldn’t ship materials, especially from hard-hit Asia. Domestically, while COVID effectively sidelined a large portion of workers, the building industry saw an increase in demand. Meanwhile, many homeowners began working on home projects like decks and fences. All those workers staying home caused material suppliers to constrain their supply. This would set the stage for the out-of-control price increases of 2021.
From 2020 to 2021, the cost of materials on a home went up a staggering 76%. Every single item saw double-digit increases, but we felt this pain most in lumber (228%), Trusses (112%), and Foundation/Concrete (87%). With demand for homes surging and a lack of available inventory stemming back to the recovery after the Great Recession, those who had continued to prosper during the pandemic were desperate to find homes. Skyrocketing demand will always drive the price up, however, in this case, it was exacerbated by lack of materials, attributable to lack of raw material and lack of labor to create the finished goods. With less to go around and higher demand, the price increase was explosive and often constant.
Throughout the last 12 months, our stores have often struggled to purchase inventory and had to get creative with our purchasing. Even still, we are on allocation from many suppliers (meaning they will only sell each customer a certain amount of material – in the case of I-Joists, each supplier was only allocated 80% of their previous year’s sales). Thankfully we may be slowly turning a corner, but more on that in a moment.
The line items missing from the chart are labor and land. There has been a considerable lack of skilled labor since so many exited the industry in 2007/2008. Before the pandemic, most builders were booked out anywhere from 3 months to 2 years. Suddenly the pandemic pulled a chunk out of their existing workforce and also doubled down on demand. Naturally, this pushed prices up as builders frantically tried to keep pace. There are also only so many lots available to build on, and since so many people couldn’t buy a house, many turned to purchase land.
What we’ve had is truly a perfect storm, further aided by things like inclement weather (snow and freezing in Texas, shutting down plastics factories), transportation issues (lack of employees to offload or haul freight from harbors across the country), and restrictions around every corner. We’re happy to say, though, that we believe we have some reasons to be optimistic for the near future.
Many production builders (DR Horton, Quadrant Homes, etc.) have decided to stop building completely until the lumber market cools down. This has helped ease some of the demand for these commodity items. Additionally, most mills have continued to ramp up production, pushing out additional inventory. Finally, more Americans are getting back to work, which has helped across the spectrum, as our economy has started to move more fluidly.
We do not believe that we will see a sharp decline in commodity pricing or a crashing market like after the last bubble; instead, many expect a slow descent to more reasonable prices. At the same time, we are still wrestling with a housing shortage. In 2007 there was practically a spec home on every corner, so when the financial meltdown began, there was a glut of available inventory. We saw supply quickly outpace demand, and as such, the prices plummeted – a very different scenario than today. Additionally, stringent lending practices put in place after the Great Recession ensured that most people who secured financing for homes were truly qualified to pay the money back, even if they had to weather the storm while doing so. This has helped us avoid the toxic debt crisis that crippled our nation in 2008.
The last 18 months have been unlike anything most of us have ever experienced and certainly a departure from our own experiences. Thankfully the clouds seem to be parting, and the path ahead looks promising. We want to thank our customers and partners for working through this time with us. It has been our honor to continue to support you and help make sure your businesses have been able to continue and hopefully even thrive in these challenging times.
We look forward to a bright future, and we know we will be ready for whatever may come next.