The supply chain mess bogs down home construction.
By Wolf Richter for WOLF STREET.
The inventory of new single-family houses that homebuilders put on the market for sale rose to 389,000 in October, the highest since September 2008, according to data from the Census Bureau:
These houses for sale are in all stages of construction. When you go to a new development, the homebuilder has already completed some houses, but others are under construction, and others haven’t been started yet. If you buy a home where construction hasn’t started yet, the homebuilder will offer the most choices in terms of the appearance and finishes of the house.
Sales of new houses at all stages of construction — not started, under construction, and completed — fell 23% from the pace at the same time last year, to a seasonally adjusted annual rate of 745,000 houses.
As the chart below shows, sales of new houses have long been far below their 2002-2007 heyday, as housing demand shifted to condos and apartments in urban cores, triggering a large-scale construction boom of towers and mid-rise buildings, that are not reflected here. Here we’re only looking at single-family houses:
Given the rate of sales in October, the supply of new houses for sale, at 6.3 months, has now remained roughly at the same high level above 6 months since June.
So what’s the deal here with this pile-up of inventory?
Homebuilders are struggling with shortages of all kinds, including shortages of windows and appliances, and completing a house has become a complex task of dodging supply-chain chaos, where builders are trying to find substitutes for the things that they cannot get. Houses remain under construction with no activity while the builders wait for supplies to come in. Other projects are being put on hold or don’t get started due to the supply shortages.
In addition, homebuilders are facing rampant price increases in materials, and they’re facing labor shortages that cause them to increase wages, and contracts can reflect the uncertainty about those price increases and could get the buyer stuck with higher costs.
Construction costs spiked out the wazoo.
The index for construction costs of singled-family houses spiked 13.3% year-over-year in October, the worst year-over-year increase since 1979, and by 18.5% in the two years since October 2019, according to data by the Commerce Department. Construction costs have jumped year-over-year by the double-digits every month since May. This excludes the cost of land and other non-construction costs:
In terms of the index in the chart below, not the year-over-year percentage change, you can see the spike in construction costs taking off in June 2020 (black dot), and has been relentless ever since.
During the housing bust, construction costs fell 11.5% from the peak in April 2007 through May 2010, and then didn’t really move much for another two years. The opposite is happening now:
A peculiar effect: Inventory for sale by stage of construction.
Given the uncertainties around getting the house finished in any reasonable time frame due to the shortages, getting all the appliances installed, etc., and knowing what the final price is going to be, potential buyers are reluctant to buy a house under construction or one where construction hasn’t started yet. And that inventory sits.
In October, a record 109,000 single-family houses where construction hasn’t started yet were on the market for sale, amid a thicket of shortages and delays. Note that in the run-up of the last housing bust, houses for sale where construction hadn’t started yet peaked in April through June 2006, just before the whole schmear came apart:
Another 242,000 houses were under construction in October, in the same range as over the past two months, the highest since the peak of the last construction bubble:
But completed houses for sale, at 38,000 houses in October, remained near record lows, beaten only by the prior months this year, and accounted for only 9.8% of total houses for sale, just a hair above the prior months, which had been record lows in the data going back to the 1970s. The 25-year average of completed houses for sale as a percentage of total houses for sale, at 28%, is nearly triple that:
There is strong demand for completed houses, and inventory of completed houses is very low because houses are now a challenge to complete, amid the supply-chain mess. But the sudden cost increases during the construction process, and the delays due to shortages, ripple through to people who’d bought an unfinished house. And that’s not good for the builder or the buyer. And that part of the market has gotten mired down.
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