The Housing Scene by Lew Sichelman

Builders Can’t Keep Up

One weekend last month, Ben Caballero happened by a block in Argyle, Texas, where four home builders had set up model homes. Both sides of the street were lined with cars.

Unfortunately, builders are so far behind in construction these days that anyone who signed a contract that weekend probably won’t be able to move into their new residences until late spring or early summer.

“Builders simply can’t build homes fast enough to meet the remarkable demand,” says Caballero, whose HomesUSA is the broker of record for dozens of builders in four of Texas’ biggest markets. And it’s not just happening in the Lone Star State, but everywhere.

Usually, sales and new home starts move almost in lockstep. But these are not normal times. In its latest poll, marketing and research firm Zonda found that 30% of builders reported taking “weeks longer” to start work. And 6% said they were “months” behind.

According to Robert Dietz, chief economist at the National Association of Home Builders, by the middle of last year, sales outpaced the start of construction by the largest gap ever. By October, that record-breaking gap had widened even further. And by November, the count of sold-but-not-yet-started houses was up 69% from a year earlier.

“The gap is unprecedented,” says Dietz. “There is no comparable period in the data going back to 1963.”

Although new home sales slipped at bit in November, they were still 21% higher than a year ago, as demand continued to be supported by low interest rates, a renewed consumer focus on the importance of home, and rising interest in lower-density markets like suburbs and exurbs. On net, sales were up 19.1% for the first 11 months of 2020.

But starts have failed to keep pace. The spread between sales and starts is even greater than Census Bureau figures indicate, Dietz says, because the government’s count includes custom houses and those built specifically for rent.

Dietz indicates some slowing in sales is necessary, and believes builders may be pulling back a tad on taking new contracts until they can catch up. “Builders don’t want to get too far out over their skis,” he said in December.

That leaves the inventory of completed-but-unsold houses extremely low. Nationwide, the NAHB counts just 43,000 finished, ready-to-occupy houses nationwide.

Some builders have stopped selling altogether because they can’t keep up. Others are still selling, but they are raising their prices “aggressively,” Caballero reports -- in some cases, in an effort to slow sales.

According to Tim Sullivan at Zonda, at least two-thirds of the 18,000 subdivisions his company tracks have hiked prices. In September, price increases were nearly universal (94%) among projects in markets like Indianapolis, Phoenix, Denver, Raleigh, Tampa and Orlando.

That figure fell back a bit in October, the latest month for which the statistic is available. And, said Sullivan last month, “Prices are still increasing, but at a decreasing rate.”

But higher prices haven’t stopped people from looking, if not buying. Indeed, according to Zonda’s data, traffic also is at record levels. Sullivan adds: “Wait lists are back!”

Taking more deals than they can handle isn’t the only thing slowing builders down, though. They continue to face a number of headwinds, not the least of which are a lack of skilled labor and a lack of developed building sites.

But one of their main bugaboos these days is government services, or the lack thereof. Because of the virus, many local jurisdictions are operating on skeleton staffs. Some have reduced operating hours or closed some offices altogether. That means there’s nobody around to approve plans and make on-site inspections, among the myriad other services builders require.

At the same time, builders are concerned about their inability to obtain the products they put into their houses. According to BMC, a major supplier of building materials, it’s taking only slightly longer for such key items as wallboard, lumber, siding and doors, but “extended periods” for roofing, engineered wood, vinyl windows and door locks.

Two-thirds of the builders queried by Zonda were worried about their inability to get some products in a timely manner, and 53% said obtaining important government services is a problem. On top of that, prices for softwood lumber, a key building product, jumped nearly 50% between April and August -- the largest four-month gain since 1949.

Just 40% of builders said labor was an issue. And although there was no mention of a scarcity of lots on which to build, Sullivan reports that nationwide, the supply of construction-ready sites is down 9% from a year ago, while prices are up 5.6%. “Many markets are significantly undersupplied,” he says. “Availability is going down.”

Meanwhile, another big question mark is beginning to surface: appraisals. Sales are so far ahead of closings that valuations are lagging.

Until a house is finished and the buyer takes ownership, that sale can’t be used to support an appraisal on a new sale. Consequently, the appraisal could come in too low to secure the financing the next buyer is seeking. The result: They’ll either have to put more money down or walk away from the house they’re hoping to purchase.