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How the Supply Chain Problems Impact Real Estate

January 6, 2022 by Becca Stewart Leave a Comment

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The housing market went a bit bonkers in 2021. By mid-summer, housing inventory was at an all-time low, prices were surging, and homes were under contract within a matter of hours. It’s been a great market for sellers and sellers’ agents, but buyers have had more difficulty.

The lack of housing – particularly affordable housing – means more potential first-time homebuyers are forced to the sidelines. Low inventory isn’t the only problem facing homebuyers. Corporate buyers and investors are scooping up houses at an alarming rate, leaving lower-income buyers with few options to purchase property of their own. It’s nearly impossible for first-time buyers to compete with all-cash offers.

This inventory bottleneck was already causing trouble heading into the autumn of 2021. Then, supply chain problems hit. Now, the already struggling housing market faces yet another complication, leaving many wondering what’s ahead for the housing market.

Supply Chain Problems: An Overview

While many consumers became aware of global supply chain issues only recently, complications in the supply chain began more than a year ago.

Like so many of today’s challenges, it all began with COVID-19. As the pandemic gripped economies across the globe, many corporations faced lockdowns, worker absence, and government-mandated shutdowns worldwide. What started as many smaller hiccups have now grown into a full-scale supply chain crisis.

Shipping containersAbout 90% of the world’s goods travel by sea. In an increasingly global economy, nearly everything comes from elsewhere; even items manufactured in-country likely contain foreign parts. With so many delays at overseas manufacturing facilities and ports, those delays trickle down to businesses both big and small.

While many manufacturers began feeling these supply chain problems months ago, most Americans only really started to notice them as the holidays approached. With more money in our bank accounts, we began purchasing more goods than at nearly any time during the pandemic. But as businesses ran out of inventory, they couldn’t restock the shelves. Most of their inventory remained stuck in ports overseas or at landing ports in the U.S., awaiting transport.

Supply Chain Issues and Home Building

Christmas lists weren’t the only thing impacted by the supply chain. Many of the raw materials that home building companies use are also shipped from overseas locations. The supply chain problems have affected home builders since the beginning.

Construction companies represent one of the largest consumers of overseas raw materials. As shutdowns and worker shortages caused shipping delays, home builders began running out of vital materials needed to build homes. The available materials rapidly increased in price, causing home prices to increase as well.

Stack of lumberRaw materials aren’t the only thing causing home prices to rise. Everything that goes into a new build is more expensive, too: fixtures, appliances, flooring, paint. The longer the supply chain problems continue, the more expensive it is for builders and, ultimately, for buyers.

Heading into Q3 of 2021, many builders had raised prices of new construction projects or canceled projects altogether. New builds are taking longer to complete, leaving many buyers frustrated and confused – and many home builders anxious over their current financial state.

Homebuilders are shifting their strategy, focusing on customer satisfaction, communication, and trust to weather the storm. With supply chain issues expected to last into 2022, many home builders are searching for ways to circumvent traditional supply chain practices. Companies are searching out alternative suppliers, finding new and innovative ways to complete their projects within the deadline and within budget.

Consumers are making sacrifices, too. According to an article in Builder Magazine, some buyers are sacrificing high-end finishes and customization in order to get a home completed within their desired timeframe.

Inventory Shortage and Supply Chain Problems

Buyers face longer wait times for new construction homes, which further complicates an already growing inventory shortage. Even before the pandemic, the American housing market was bottlenecked. Too few affordable housing options, too many buyers, and not enough new construction homes to make up for the shortage.

Now that the supply chain problems have entered the equation, the inventory shortage is expected to worsen. Supply shortages mean it will take home builders longer to finish construction, leading to fewer new starts. Over time, that can dramatically impact the overall housing supply in a time when housing shortages are already a problem.

The increased shortages, of course, lead to higher prices, further complicating an already difficult market for home buyers.

Labor Shortages

It’s important to note that supplies aren’t the only thing that home builders are missing. Labor is increasingly hard to find, too. In some instances, the labor shortage is an even bigger crisis than the supply chain problems.

Construction workersIn a December 2 interview, the Home Builders Institute (HBI) reported 430,000 open jobs, with an additional 61,000 workers needed every month to keep up with demand. Before the pandemic, the tradesman shortage was an issue, but COVID has only made it worse. More and more older tradesmen are leaving the workforce while fewer younger people are entering skilled trades. That is, construction crews are retiring, with no one to replace them over the next few years.

Without this skilled labor, home builders face a seemingly insurmountable crisis. With demand at an all-time high and inventory at an all-time low, how can construction companies keep up with the increasing need when they don’t have people to build these homes?

One possible solution is to give new workers incentives for entering the construction trade. But these workers must first work their way through a trade school or other training programs, which takes time. Time, say experts, that the housing market simply doesn’t have. As the industry anxiously waits for new trainees to enter the field, the new construction backup continues.

Shortages Lead to Increasing Prices

Labor shortages, supply chain problems, and a home inventory shortage all lead to increased costs for consumers. It’s a basic supply-and-demand equation: lots of buyers, with not enough homes for everyone. This low inventory leads to high demand, with multiple buyers bidding on the same house. Of course, multiple bids mean increased prices.

Builders face a similar problem. With fewer supplies to go around, builders are willing to pay more for the raw materials they need. These increased prices are then passed along to the consumers. Eventually, the costs will squeeze out lower-income buyers, essentially blocking their dreams of homeownership.

A Positive Forecast?

Despite the supply chain problems and worker shortages impacting new home construction, the outlook for 2022 appears mostly positive. It will continue to be a sellers’ market, with home prices remaining high thanks to high demand. While that might not be the best news for homebuyers (particularly first-time buyers), it’s a positive outlook for the housing market overall.

New home constructionHomebuyers remain confident in the housing market, even amid the rising costs and longer wait times. An October 2021 report found that consumer confidence in the single-family home construction market rose 4%. While consumer confidence is still down from Q3 2020, the 80% consumer confidence rating remains hopeful. Many builders have slowed their home sales, focusing on meeting current demand instead of overpromising to buyers.

Homebuilders continue to move ahead with planned construction, though projects may take longer than in the past. Homebuyers and those considering home renovation projects must approach the 2022 market with patience.

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Filed Under: Blog Tagged With: COVID-19, First Time Homebuyer, Home buyer, Home buying, Inventory shortage, New Build, New construction, Supply chain

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