Frustration building within construction industry

Lumber is piled up at a home construction site in Middleton, Massachusetts, in June. Delivery delays of building materials and shortages of labor are affecting builders across the U.S. (Elise Amendola/AP file)

By Alex Veiga
The Associated Press

LOS ANGELES – Even in the hottest U.S. housing market in more than a decade, new home construction has turned into a frustratingly uncertain and costly proposition for many builders.

Rising costs and shortages of building materials and labor are rippling across the industry, which accounted for nearly 12 percent of all U.S. home sales in July. Construction delays are common, prompting many builders to pump the brakes on the number of new homes they put up for sale. As building a new home gets more expensive, some of those costs are passed along to buyers.

Prices of items such as paint and lumber and other building materials have spiked this year. The Federal Reserve is meeting this week, and its time frame for potentially starting to raise interest rates could indicate how worried it is about inflation.

The constraints on homebuilders further impact homebuyers, who already are facing historically low numbers of resale homes on the market as well as record prices. Economists worry many first-time homebuyers are getting priced out of the market. The erosion in affordability is one reason the pace of home sales has been easing in recent months.

Sivage Homes, a builder in Albuquerque, N.M., is seeing its efforts to keep construction on schedule undercut almost daily by delays for everything from plumbing fixtures and windows, to bathtubs and appliances.

“Nowadays, we literally could be sitting waiting 30 days, maybe even 60, for one thing or another,” CEO Mike Sivage said. “I’ve been doing this since 1986 and I have to say I’ve never seen anything like this before.”

The pandemic set the stage for higher prices and shortages of construction products. Factories went idle temporarily and are now trying to catch up on production at the same time that demand has intensified due to an unexpectedly hot housing market and a surge in home remodeling.

Lumber futures jumped to an all-time high of $1,670 per thousand board feet in May. They’ve since dropped to $634 – about 10 percent higher than a year ago. Still, wholesale prices for a category of homebuilding components that includes windows, roofing tiles, doors and steel increased 22 percent over the past 12 months, according to an analysis of Labor Department data conducted by the National Association of Home Builders. Before 2020, it was typical for such aggregate prices to rise a little more than 1 percent annually.

Those conditions are likely to persist. Robert Dietz, chief economist at the NAHB, said he’s heard from builders that “there are ongoing challenges, and in some cases growing challenges, with flooring, other kinds of building materials.”

Meanwhile, any savings on lumber have yet to filter down to many builders, including Thomas James Homes, which operates in California, Washington and Colorado.

“The price we’re paying for lumber today is the same price we were paying 90 or 120 days ago,” said Jon Tattersall, the builder’s president, who noted his company’s overall building costs have increased about 30 percent since November.

In March, a worker carried beams for a home construction project in Madison County, Mississippi. These days, the homebuilding industry is facing a number of challenges. (Rogelio V. Solis/AP file)

Homebuyers shouldn’t expect to see any discounts from falling lumber prices either, because builders set their prices based largely on overall demand in the housing market.

A signed contract for a home yet to be built typically includes an allowance for unexpected construction costs, but generally builders will have to eat big increases and then pass them on to the next buyer.

“On our future ones, those are the ones we’re having to raise the costs on,” Tattersall said.

Higher building materials prices aren’t the only factor driving up builders’ costs. A chronic shortage of skilled workers has worsened during the pandemic, forcing builders to factor in higher labor costs.

Inflation is being felt across the economy. Consumer prices rose 5.3 percent in August from 12 months previous. At the producer level, inflation jumped an even steeper 8.3 percent – the biggest annual gain on record.

The Federal Reserve has said it believes the surge in inflation will be temporary. For now, though, rising costs of building materials and the lingering supply crunch are making everything from houses and apartments to commercial buildings more expensive.

To manage, many builders are slowing the rollout of new homes. Zonda Economics, a real estate data tracker, estimates some 85 percent of builders are intentionally limiting their sales.

“They’re trying to make sure they have the land ready, the workers ready and the materials ready to be able to actually deliver the homes that they’ve sold,” said Ali Wolf, Zonda’s chief economist.

Even with inflation, builders are benefiting from the hottest housing market in years. Demand for new homes has strengthened, while the number of previously occupied U.S. homes up for sale has fallen to historic lows, pushing prices higher.

The median price of a new home sold in July climbed 18.4 percent from a year earlier to $390,500 – an all-time high, according to the Commerce Department. For existing homes, the median price jumped 17.8 percent in July to $359,900, according to the National Association of Realtors.

Builders typically hire subcontractors to handle framing, electrical, plumbing and other facets of construction. As these firms have faced higher costs to secure skilled labor or source the materials they need to do their job, they’ve had to pass those increases onto builders.

Tri Pointe Homes, which builds homes in 10 states, including California, Texas and Maryland, has faced higher labor costs. It’s been working through those increases, at times moving beyond its core group of contractors, CEO Doug Bauer said.

One way Tri Pointe and other builders are dealing with product delays is to ask contractors to install temporary fixtures and appliances, for example, so that buyers can move in as quickly as possible.

“Then, as soon as the original item becomes available, we are returning to install it,” Bauer said.

To stay ahead of rising costs, Tri Pointe has increased its home prices and reduced buyer incentives when necessary. Even so, the builder has adjusted its guidance on the number of homes it expects to deliver this year from 6,000 to 6,300.

While the big, publicly traded builders have the means to buy building materials and warehouse them until needed, smaller builders that make up the majority of the industry are at the mercy of suppliers.

Sivage, whose company builds homes priced from $250,000 to $1 million, used to be able to lock in the price of lumber with suppliers a year in advance. That changed now that demand for lumber has increased. Now, Sivage doesn’t know what it will cost him until it’s ready for delivery.

“We’ve had to grin and bear it,” he said.