The United States seems to have turned a corner on Covid, but the ripple effects from the pandemic and shutdowns are still being felt. The predicted “roaring back” — while definitely here — has also been noticeably uneven. No one’s ever shut down a complex, interconnected, global supply chain before… and restarting it has been rife with complications and delays.
It’s true that concerts and other public events are taking place again, and that most day-to-day restrictions have been phased out. It’s also true that the forces of supply and demand are creaking pretty loudly… as they slowly resume where they left off a year ago. Last year’s consumer goods challenges (remember empty toilet paper shelves?) have given way to labor and industrial supply chain disruptions.
While industries as wide-ranging as automobile manufacturing and meat processing are reeling from the blowing winds, the construction industry seems to be in the middle of a hurricane. It’s a perfectly imperfect clash between explosive demand and throttled supply.
Meanwhile, demand for both commercial and residential construction is rising. While at the same time shortages and price volatility in lumber, steel, and other components complicate construction firms’ ability to meet the rising demand.
Yet, despite all of the upheaval, opportunities abound — and it’s precisely this kind of disruption that can shake up “business as usual” and lead smart, fast-thinking building products companies to new levels of success.
Here are a few of our observations regarding key happenings in the marketplace.
New housing construction has exploded
According to the Mortgage Bankers Association’s 2021 forecast, single-family housing starts this year will be around 1.134 million. This will mark the first time that housing starts have been over one million units… since 2007.
And that could just be the beginning, as projections are even rosier: 1.165 million single-family homes in 2022 and 1.210 million in 2023. Sales of existing homes have increased remarkably, and new homes can’t be built fast enough to meet demand.
Despite these optimistic forecasts, however, material and labor shortages are challenging. As are home builders’ ability to meet the surging demand for new homes. In June, a report from the U.S. Commerce Department showed permits for future home construction falling. Housing completions also declined while the number of homes authorized for construction — but not yet started — were rising… indicating that supply will likely remain tight for a while. And will continue to contribute to housing price inflation.
Sales of existing homes are surging
This is an international phenomenon, and housing prices worldwide are rising the most they have… since before the global financial crisis in 2008.
A recent Knight Frank’s Global House Price Index report showed that, globally, average home prices jumped 7.3% in the 12 months prior to March 2021… the fastest pace since the fourth quarter of 2006. Of the top-performing 15 countries listed, the U.S. took the fifth spot — with a 13.2% increase — its steepest uptick since December 2005.
According to the S&P CoreLogic Case-Shiller National Home Price Index, by April of this year, U.S. home prices had jumped another 10+ points to 14.6%.
Home prices are expected to continue to rise as demand outstrips supply.
Driving this feverish spike is a perfect storm: low interest rates, a post-pandemic desire for more space, and newly remote workers taking city cash to regional locations.
Home renovation and maintenance activity is on the rise
Home renovation spending has grown 15% in the last year to a median of $15,000, according to the tenth annual Houzz & Home survey of more than 70,000 U.S. respondents. Higher budget projects saw an increase to $85,000 or more in 2020… compared with $80,000 in the two years prior.
Kitchen projects are the most popular among renovating homeowners. And remodels of large kitchens jumped 14% to $40,000 in 2020… compared with $35,000 in 2019. The study also found that the busy renovation market will continue in 2021 — with 56% of homeowners planning to renovate this year — the highest share since 2017.
This research report provides valuable insight into consumer attitudes and behaviors when it comes to their homes, while a recent study from Angi (formerly Angie’s List) examines the environments in which these attitudes and behaviors play out.
The Economy of Everything Home includes the most comprehensive and up-to-date estimate of what Angi calls the “Total Addressable Market” (TAM) for home services in the U.S. This report estimates a TAM of $595 billion. And a total of 728.3 million household projects for 2021. Additionally, it forecasts further growth in the market due to supply shortages, rising input prices, low interest rates, home equity gains, and demographic shifts.
The metrics can be broken down into three distinct sectors:
- The home improvement market: $376.9 billion | 148.5 million projects
- The home maintenance market: $157.7 billion | 500.3 million projects
- The home emergency repair market: $60.6 billion | 79.5 million projects
The report estimates that there are currently a total of 141.5 million housing units in the U.S. Of particular note regarding renovations, nearly 40% of America’s housing stock is more than 50 years old.
Demand is growing for commercial building developments
After a dramatic slowdown in the second quarter of 2020, non-residential construction starts are rebounding. According to a study released by Autodesk, the non-residential building industry sectors expected to see the largest year-on-year growth in 2021 are healthcare at a 9.6% increase, office buildings at 7.4%, and commercial construction at a 6.6% expansion.
Yet. the cost of construction goods is increasing
The NAHB states that lumber prices have been especially volatile in the wake of the Covid pandemic… and that’s due both to increased demand and constrained supply chains.
After peaking at around $1,700 in mid-May, lumber prices are now well below $1,000 per thousand board feet. And analysts expect the prices to continue to drop as we move through 2021.
It’s more than just lumber, however — steel, copper, gypsum, concrete, asphalt, millwork, and other components are also experiencing price and supply volatility. A further complication is a global microprocessing chip shortage that is reverberating across all industries.
This volatility is unprecedented — and since April 2020 — it’s added nearly $36,000 to the average price of a new single-family home… and nearly $13,000 to that of a multifamily home.
Nothing’s moving the way it used to and there are widespread delivery delays
A global supply chain can manufacture and distribute materials and goods efficiently and cheaply. When it’s working that is.
Lumber from Canada can’t get to the United States when the border is closed. Electrical components from Malaysia can’t be manufactured when that country’s factories are shut down. Delays and disruptions in supply availability complicate and add to the increased costs of those supplies.
U.S. ports on the West Coast are struggling to process and unload container ships. After a dramatic slowdown in global traffic last year, container shipments have bounced back exponentially. However, this surge has caused backlogs that are reverberating throughout warehouses, distribution centers, and railroads.
Home Depot is one of the largest importers in the country and has taken the extraordinary step of chartering its own ship.
“We have a ship that’s solely going to be ours and it’s just going to go back and forth with 100% dedicated to Home Depot,” president and Chief Operating Officer Ted Decker said in an interview with CNBC.
FedEx Corporation said it would boost capital spending by 22% this year to add capacity to its network, after a surge in package shipping caused ground delivery delays and left some customers without freight service.
Localized labor shortages and uneven job growth are impacting productivity
While it’s true that employment numbers are increasing quarter over quarter as the U.S. moves past the worst of the pandemic’s economic fallout… it’s also true that the available jobs aren’t always in places — where the people to do those jobs — are located.
Contractors and builders are having trouble finding the right people for the right jobs in the right place… and it will take a while longer for that to level out.
Across the board, however, the pace of hiring rose in June. In fact, payrolls increased by the highest amount in ten months, which indicates that hiring is keeping up with the expanding, reopening economy.
Modular construction is feeling these same effects
Modular construction had its moment in the early days of the pandemic when the public health crisis forced medical facilities to meet the surging need for hospital beds.
But the same forces that are squeezing conventional construction are also tightening their grip on modular companies. And, as the recent implosion of Katerra shows, even well-financed industry disrupters can be “disrupted” permanently if they’re not careful.
Despite that high-profile failure, investors continue to pour money into modular construction and the construction tech space. For example, Veev, which builds prefabricated multifamily homes and accessory dwelling units, raised $100 million in March. And Mighty Buildings, which uses 3D printing and materials such as synthetic stone to construct prefab homes, raised $40 million in February.
Continued pressure to secure supplies to meet demand is providing modular and prefab firms with an opportunity to seize the moment. And to make significant inroads into the industry.
The Federal Reserve will start increasing interest rates, eventually
The pandemic-fueled boom in residential home sales and new construction has been aided and abetted by historically low-interest rates. Rates have been kept from rising since the Great Recession of 2007 to 2009. The Federal Reserve’s response to the Covid recession has been to keep rates low and inject money into the economy by buying bonds.
Recently, Federal Reserve Chair Jerome Powell stated that the Covid emergency was resolving and that the Fed’s response will be to scale back its bond-buying. Furthermore, Federal Reserve policymakers are signaling a future “openness” to interest rate increases in an effort to stave off inflation.
According to a recent statement from the International Monetary Fund, the Federal Reserve probably will need to begin raising interest rates in late 2022 or early 2023, as increased government spending keeps inflation above its long-run average target.
These changes in monetary policy could shift the ground underneath the construction industry… so they bear watching.
Finding opportunities in disruption
Amidst the complicating factors of price increases, delivery delays, and labor shortages, it’s easy to lose sight of the fact that construction, on the whole, is rebounding significantly. Residential, commercial, and — very soon — civil construction activity will reach levels not seen in the U.S. in years. Supply chains will work out their kinks. And, as more and more people get vaccinated in the U.S. and around the world, labor shortages ultimately will even out.
The U.S. is turning the corner on this pandemic and it’s important to be mindful that, although things seem to be getting back to normal here, the same thing can’t be said about the rest of the world. In an increasingly connected, global economy, that matters.
So, where are the opportunities for you and your building products company? What can you do to take advantage of the conditions in which you find yourself today? What could you be doing differently or better? What should you be in-sourcing… and out-sourcing?
It’s easy to get so caught up in the problems and challenges that you miss the equally abundant opportunities. Now is the time to find ways to leverage these opportunities for business growth.
Planning for a post-pandemic future
All things pass with time… and that includes current supply chain disruptions and labor shortages. It’s important to rise to the challenges today, of course, but it’s also vital to learn from these constrictions and make needed adjustments.
Looking for a way to adapt your building products brand strategy to current (and ever-evolving) market conditions… and to create a better customer experience that will help your brand stand out from the competition? Send an email to Steve Kleber at sk@kleberandassociates.com to learn more.
