Eye on the Economy Supply-Side Challenges in Focus

SUPPLY-SIDE CHALLENGES

in Focus

BY ROBERT DIETZ T he economy, aided by a historic amount of deficit-financed stimulus, is booming. While GDP growth is expected to post the best year since at least 1984, the commonly cited challenges to maintaining momentum — and warding off persistent inflation — are coming into focus. Builders have faced these supply-side challenges for years, and that experience indicates relief will be partial and slow.

For home builders and remodelers, the top industry challenge is attaining affordable and reliable sources of building materials. In fact, a recent NAHB survey revealed a record number of builders are reporting material shortages: 94% citing a scarcity of lumber and 95% reporting delays for appliances. These numbers are unprecedented over the last two decades. The economic factors behind the lumber shortage are clear: while U.S. sawmill output posted a small 3% gain in 2020, single-family construction increased 12%. Moreover, imports of Canadian lumber were lower in 2020 than they were in 2016 (at the onset of the current lumber dispute), despite a large gain in construction volume.

Regulatory burdens remain an important cost factor as well. NAHB updated the regulatory analysis from 2016 and found in the 2021 survey that for the average new single-family home, there were almost $94,000 in various regulatory costs. This marked an 11% gain from 2016 and a 44% increase from a decade ago. And in just the past year, new-home prices have risen 20%. While housing demand remains strong, these higher costs will eventually cause the market to cool.

The labor market offers both good and bad news for the residential construction industry. Overall employment continues to improve, helping housing demand. Although smaller than forecast (likely due to expanded unemployment insurance benefits), the economy created 559,000 jobs in May on a net basis and the unemployment rate fell to 5.8%. However, hiring in the construction sector is becoming more challenging. The number of open jobs in construction (357,000 in April) increased to an almost two-year high.

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