A Candid Conversation About Issues Affecting Home Building Industry Today

I wanted to write this article to shed the light on the current state of the building industry and the challenges that we’re seeing in the marketplace and to address a mislead perception about builders in general.  So often I see comments like: “I can’t believe they’re charging $500,000 for this house-what a rip off!” and similar comments implying that builders are charging outrageous amount for new homes simply because they are greedy.

I understand that most people don’t follow the building industry closely and are not familiar with challenges that we face and may only hear about the cost of rising housing and bidding wars for existing inventory on the news. It’s really easy to assume that the rising cost of new construction is because builders want to make money and they simply increase the price to make more profits. But that’s not the story and that’s why I wanted to share this information with you.

Housing affordability is one of the biggest challenges facing the home building industry and it has gotten worse since the beginning of pandemic and unfortunately is only expected to become more severe in the coming years. There are several factors contributing to this, so let’s take a look at some of them.

1.     Labor shortages.

One of the biggest issues is labor shortages-specifically shortage of qualified trades in home building industry today. Less and less young people consider a career in skilled trades and instead opt out to go to a four-year college to pursue other opportunities. Labor force from other countries left after the great recession of 2008-2010 and has not returned for the most part. Stricter immigration rules contribute to this shortage as well.

The building industry is projected to grow by about 10% in the next decade and 40% of our existing skilled labor force is also expected to retire in the next decade, leaving us with a whopping 50% shortage in labor force. And that’s a big problem. When you have a labor shortage that means that many builders are competing for a few work crews. This leads to higher labor cost and potential disruption in construction time frames. During the last housing boom it was not uncommon for builders to “steal” crews from one another by simply offering to pay them more. So crews would literally walk out on projects.

2.     Lumber price.

The price of lumber more than doubled since March of 2020 from $410 per thousand board feet to $1021 per thousand board feet today, adding more than $25,000 to a price of an average single-family home. When the pandemic first hit, most mills shut down lumber production and many mill managers anticipated a housing collapse, but the opposite happened. Not only housing didn’t collapse, but there was an increased demand for homes while we’ve seen historically low inventory of available homes in the market. Pandemic disrupted lumber production in a major way causing pricing to skyrocket.

At the same time we have major tariffs on foreign lumber-for example, it was 20% on Canadian lumber, which recently was reduced to 12%. On the domestic front with the new administration and push for going green and conservation it will put some potentially additional restrictions on production of lumber. So overall, it’s a huge challenge and a big issue that needs to be resolved in order to move towards affordable housing.

Lumber is not the only commodity that’s affecting cost of new construction. We’ve recently seen steel prices rising as well. And if pricing is not rising, then we’re seeing major disruptions in supply chain.

3.     Supply chain disruptions.

The pandemic put pressure on every aspect of homebuilding. We’re seeing shortages and longer delivery times on all building materials from nails to drywall to appliances, etc. Longer wait time means it takes longer to build a home which results in additional carrying costs for the builder such as higher taxes, HOA fees, mortgage payments, etc.

And delays are not just coming from materials side, but also from a human side. For example with remote work, it takes longer to get plans and permits approved as well as to complete inspections. If it took one day for inspections pre-pandemic and all work needed to be stopped until checked off by an inspector, now we may wait for 2 weeks or longer for the same inspection to take place which results in a complete stand still.

4.     Overregulation.

This one is tricky because there is a fine line between overregulation and unnecessary increase in cost of building that would not be recouped by homeowners for years to come if ever, vs lack of regulation. Recent events in Texas caused by cold temperatures and snow shed a light on what can happen when there is a lack of building code enforcement. But sometimes law makers tend to go too far requiring builders to achieve new levels of energy efficiency which come at a high cost, but result in minimal savings/improvement to homeowners. Right now we can attribute about 34% of total cost of a home to regulation cost and this cost is expected to increase to over 50% in the next few years with potential changes from new administration.

5.     Building is a risky business.

We’re certainly not the darlings of Wall street because there are a lot of risks associated with developing land and building-a lot can go wrong in the process and it’s not for a weak of heart. The higher the risk, the higher the return-but what happens when the return is not worth the risk? With rising price of home building we’re starting to see appraisals coming in close to cost of building that home and that’s a problem. Number of permits for new construction is down in Chicago from just a year ago. Many builders just can’t justify the financial risk of building.

Through the pandemic housing has been a bright light and a success story that have kept our economy alive. Building one single home provides enormous economical stimulus to the area and most importantly jobs. Building affects so many different areas of our economy and we need to fix a lot of current issues facing home building in order to make housing affordable for people. We’re in this together. I hope this sheds some light on challenges faced by home builders today and you can help shape the future of this industry by talking about these issues with our policymakers.