What is Wrong With the Housing Market?

Everyone needs a place to call home. And families with children tend to need a bit more space. 

As our nation has evolved, families have increasingly come to prefer single-family dwellings. And for a significant number who cannot manage this currently, this remains an ideal they seek for. It’s often referred to as an important part of the American dream. 

The recent changes in the housing market, then, are more than mere economic minutia. They strike at significant elements of what it means to be a family in the United States. Understanding the factors behind the sudden housing market upheaval is also important for anyone with an interest in US family policy. 

The recent changes in the housing market have started to worry many hopeful hard-working people that they may never be able to own property.

My intent is to break down both what has happened over the short term in the pandemic era but also to look at the long-term threats to available housing, and how the short-term trends may impact the long-term outlook.

Overall, we have seen a massive swing in supply and demand due to a shortage of existing housing inventory and supply chain issues in new construction. Additionally, labor shortages and outdated zoning create a looming shadow for the future of housing. 

Existing Housing Inventory

When the pandemic hit and everyone started making their homes a personal hibernation chamber, there was a big change in what people wanted in their homes. The benefits of living in cities with robust community resources became moot because those resources were no longer available. Additionally, the mass migration to remote work made the walls of your own home the only world you were allowed to occupy. The desire for more space became a necessity. The first domino dropped.

Homes in suburban areas started to see record low days on market. With everyone on lockdown, nobody was selling—which meant there was a small inventory of homes available for the masses that wanted more space. That prompted prices to start to skyrocket on the few available homes and caused a cascading effect on the entire housing market.

Not only were suburban homes increasing in price, but urban and rural homes started to see a similar rise because of the standard market effects on comparable goods. Homeowners were presented with the problem of staying put and seeing their home value rise at unprecedented rates, or relocate and risk overpaying or not finding anything at all. Most people chose to stay put, so the few brave ones who relocated were forced to start overpaying well above asking and appraisal prices to ensure they would have a place to live. As those prices started to increase, people had even more incentive to stay put and see their assets appreciate, so supply got even tighter and so on and so forth. It was almost like a bank run. 

Maybe new construction could alleviate the problem, some wondered. 

New Construction

As the government forced lockdowns and the economy began its initial shutdown, material suppliers (lumber mills, steel and copper manufacturers, etc) bet that demand would decrease similarly to most industries at that time, so they laid off a portion of their workforce and scaled back production. Consequently, they were radically underprepared for the surge in demand for new construction as well as all the home DIYers who needed to make their hibernation cave more habitable.

No material saw the effect quite like lumber. Lumber mills radically scaled back due to the initial bets that demand would decrease. However, demand was on the rise, and getting production back up to snuff couldn’t happen overnight. Manufacturing had to change to accommodate COVID safety measures and plants saw regular shutdowns as workers started contracting COVID. Eventually, prices and production reached an inflection point that no longer incentivized sufficient production. Lumber mills could make more money by producing less because production at full capacity would start to equalize the prices.

Lumber wholesalers across the country were told to expect 75% of the 2020 supply even though demand was higher than 2020. Communication from the lumber mills decreased and the attitude became, “be grateful for what you get and stop bothering us,” NASDAQ Lumber futures, which have a close correlation to market lumber prices, rose from $450 to over $1600. The average home-build was paying $36,000 more per home for the same amount of lumber. 

To make things worse, the freeze in Texas caused issues in petroleum and resin production. Petroleum and resin are key components in lots of building materials like paint, roofing shingles, and OSB. OSB, similar to plywood, makes up the biggest portion of the exterior wood for a home and a single 4’x8’ sheet rose from $8 to $60.

Some are accusing lumber mills of violating antitrust laws to keep prices high. Three contractors filed a lawsuit a few weeks ago against lumber suppliers for the high prices we are seeing. Given that the largest lumber mill in the world, Weyerhaeuser, needed the Supreme Court to reverse a ruling that they practiced predatory pricing, their relationship with this type of business practice could easily be called into question. 

The National Association of Home Builders (NAHB) even petitioned the White House and Congress to eliminate the tariffs on foreign lumber. While this wouldn’t radically reduce the prices of lumber, it would definitely ease the burden and help stabilize the increases. 

Now, lumber futures have already started to drop. The all-time high of $1670 at the beginning of May was down to $774 as of July 8th. Some speculate that this decrease is from the use of more expensive alternative materials. For example, some builders are using floor trusses instead of standard joists because the OSB needed to produce joists is unavailable, but floor trusses are about twice as much to produce. Therefore, the lumber future decreases might not be seen in actual home prices. It’s a step in the right direction, but we might not be out of the woods quite yet. 

Similar complications plagued most common building materials, like concrete, copper, and steel. For example, OSHA typically does their yearly audit of concrete manufacturers early in the year while demand is low. These audits require manufacturing shutdown and decreased production, so demand was at its highest and the audit still took place; a massive backlog was created and prices increased. Even fly ash was affected. Fly ash is a byproduct of coal combustion that is often added to concrete mixes in small portions as a replacement to cement because fly ash can be procured for pennies on the dollar. The pandemic supply chain effects made fly ash unavailable, so concrete suppliers had to increase the amount of cement in their mixes, and concrete prices increased.

Most home builders struggled to make any money because prices to the home buyer were often fixed at contract signing, but the building wouldn’t finish for months after. The rapidly rising prices were drastically cutting into home builder margins, while raw material manufacturers captured the price increase and wholesalers passed the increase along. Homebuilders started adding price escalation clauses to their contracts to avoid losing money on their homes. Some home builders chose to cancel all existing contracts and try to finance home builds without buyers, so they could sell them on the open market at the latest prices.

Labor Shortages

Despite these short-term effects from the pandemic, there are some more looming long-term problems that face the housing industry and subsequently the dream of owning a home. A 2019 NAHB report showed that labor shortages were the top concern for home builders going into 2020. Simply, there is only so much that home builders can do when the average American is unwilling to work construction.

The demonization of blue-collar work has been going on for generations. The adage that you should “take school seriously, so you don’t have to be a garbage man,” has certainly had its effect on America. We are seeing university attendance rates at an all-time high and blue-collar labor rates at an all-time low. Universities are overproducing for many white-collar jobs that already have their positions filled, so wages in those areas stay stagnant. Meanwhile, it took a framing subcontractor in the southwest over a month to find a single willing able-bodied worker. The starting pay was $18 an hour.

Theoretically, you don’t need the average American to work construction if our immigration laws reflect that. The construction industry has long relied on immigrant labor. About one-third of construction labor, today is done by immigrants, making the availability of construction labor unusually dependent on immigration policy.

Mark Boud told Bloomberg in 2017, “As new immigration policies are approved and implemented … we expect costs to continue to rise.” This trend has not changed.

The Trump administration cracked down on immigration with the infamous border wall and travel ban. Biden’s administration hasn’t exactly eased up. Kamala Harris recently completed her first foreign visit and, “She bluntly told migrants not to travel to the United States. She spoke of the evils of government corruption that lead to dislocation. She urged nations to increase “enforcement at their borders.”

However, the House did just pass a bill that could grant permanent legal status to 100,000 construction workers. The general impasse in the Senate doesn’t give a lot of hope that it would pass, but it is something. 

There are lots of innovations in the construction industry that are trying to compensate for the labor shortage. For example, the adoption of pex in the 1990s, as a replacement for copper pipe in plumbing systems, reduced installation time. This plastic tubing has some drawbacks, but the decrease in welding has allowed the same amount of plumbers to install plumbing in a lot more homes. There have been videos of massive machines 3D printing houses in concrete or recycled plastic blocks that are installed like Lego pieces. These technologies give some hope, but most of these technologies are cost-prohibitive and have a long way to go before they create a fully functioning home.

Outdated Zoning

One of the easiest solutions to the housing shortage would be building townhomes, condos, and smaller homes in lieu of larger homes. Unfortunately, not only are people showing a stronger desire for a bigger space in large part because of the pandemic, but local municipalities set the terms for what can be built. 

The existing pattern is that rural towns become suburban over a very slow process that includes smaller lot allowances and as people move into those smaller lots and become involved in local government the tolerance for smaller lots grows. By the time local municipalities are confronted with housing shortages, they are a day late and a dollar short. Dense housing is detested by rural dwellers, so few rural areas plan ahead for the urbanization that is needed to accommodate housing needs. 

Homebuilders are forced to build 2500+ sq ft homes in areas where much smaller footprint homes would be more than adequate for the typical home buyer in that area. The first-time buyers’ homes of yesteryear are non-existent and the first or second move-up homes of yesteryear have become the first-time homes of today.

Conclusion

Lucky for us, the situation doesn’t appear to be the apocalyptic tragedy some have feared. Mortgage rates are at an all-time low and credit agencies are accounting for the fact that a greater portion of income is allocated to housing. The general rule to allocate 30% of income for housing is shifting closer to 40%. If you’re willing to make concessions on commute time, square footage, and income allocated to housing, it’s still possible for people to find a home they really enjoy.

New construction can continue to implement marginal innovation changes to current techniques. For example, Entreka, and companies like it, are specializing in off-site framing to reduce build times for framing crews.

Modular housing and the advent of shipping container homes are becoming popular in urban areas where on-site construction can be logistically prohibitive. Modular homes can be built much quicker, but are receiving slow adoption because of unfamiliarity and regulation. These homes seem like one of the most promising up-and-coming construction methods and their accessibility and affordability could prove valuable. 

It’s helpful to know what we are dealing with. According to most analyses and indicators, this pandemic-era housing market is not here to stay. There is little evidence of a crash, but the market is predicted to stabilize from this short-term chaos. We need to look forward and understand what it will take to combat the situation and give people, once again, a real shot at not only life, and liberty, but also, yes, at property ownership too.