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Home Builders: Get Ready for 2022

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Home Builders: Get Ready for 2022

Pay attention to these drivers to navigate the challenges and opportunities of the coming year in housing


By Chuck Shinn Jr. December 14, 2021
Man riding unicycle looking through a telescope
A look at the dynamics and current status of the home building industry and what lies ahead. | Illustration: bbk22 / stock.adobe.com
This article first appeared in the November/December 2021 issue of Pro Builder.

Despite obvious successes in 2020 and 2021, there’s a lot of uncertainty and mixed messaging about the housing industry’s present status and future. Is there an affordability crisis? After all, new-home median sales prices jumped 20.1% to $390,900 and prices for existing homes rose by 14.9% to $356,700 during the last year. Is housing demand waning? Have we overbuilt for current demand? Is the industry experiencing a demand issue or a supply issue, with strong demand for housing and a construction industry unable to meet it? Consider the following factors.

Housing Issue: Supply or Demand?

Looking at the published statistics indicates a demand problem. Since December of 2020, the rate of existing home sales has dropped 11.6%, while new-home sales dropped 21.5% in August of 2021. The median sales price during the same eight-month period increased 15.7% for existing homes and 7% for new homes. The Housing Affordability Index according to the National Association of Realtors has dropped 12.3%, with the percentage of income needed for a mortgage principal and interest payment increasing from 14.5% to 16.5%. The interest rate for a 30-year fixed-rate mortgage on Oct. 24 this year was 3.35%—up from 2.73% in December of 2020. 

All of this suggests the industry should be adjusting to diminishing demand. However, the underlying statistics tell a different story.

Supply of existing homes is very tight. There was just a 2.4-month supply of resales on the market in September—13% fewer homes than a year ago. The typical home was on the market for just 17 days, with 86% of homes being sold within 30 days. September represented the 115th straight month of year-over-year increases, with an annual appreciation of 13.3% to a median price of $353,800. Housing demand has been extremely strong, with multiple bids—especially for lower-priced homes.

"My concern about 2022 isn’t housing demand, which will remain strong. I’m more concerned about how fast we can solve supply chain issues and address inflationary pressures."

The overall pace for new-home sales has remained strong despite the 20.1% escalation in the median sales price since last year to $390,900 and the current supply constraints imposed by builders to slow the sales pace. As of August, new-home sales are 2.4% ahead of last year. Currently there appears to be 6.1 months of supply, however, just 9.1% of the inventory is completed and ready for delivery. With low existing-home inventory and only 35,000 completed new homes, buyers are frustrated; they need to either buy a home under construction, buy a home yet to be built, or put their name on a waiting list.

Housing starts to date are up 21.5% this year. Single-family starts have increased 23.8% and multifamily construction is 16.6% ahead of last year. Home builders are trying to respond to the current housing demand despite the constraints of labor shortages, supply chain issues, and depleted lot inventories. During the housing recession, the industry lost around half of its home builders, trade contractors, skilled trades, and land developers. While about a third of those have returned, the industry still lacks adequate capacity.

Understanding the Current Home Building Landscape

Over the last several weeks, I’ve been in builder group meetings with more than 50 private home builders, from small custom to large production outfits—which are critical for truly understanding the dynamics and current status of the home building industry. 

These builders began 2021 with large sales backlogs and runaway cost increases, particularly for lumber. To cover those costs and slow sales in an attempt to reduce their backlogs, builders aggressively increased sales prices. Some cut off sales completely, some started homes on spec and only put them on the market after frame inspection, some put customers on a waiting list, releasing and pricing sales per month. Others increased construction, with one builder releasing 25 homes per week to production to try to shrink its backlog. Most of these strategies haven’t worked, and while builders have been able to cover their costs, the size of their backlogs remains an issue.

Labor shortages and supply chain problems have had a major impact on builders, requiring them to extend construction schedules by 40 to 45 days, even upward of 75 days. There are shortages and long lead times—typically 18 to 24 weeks—for all types of building products: appliances, cabinets, hardwood flooring, soaker tubs, light fixtures, electrical boxes, windows, slab doors, garage doors, I-joists, HVAC compressors, adhesives, paint, drywall, and color PVC sewer pipe for land development. 


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To counter these supply problems, home builders are limiting plan offerings and customer selections, with many eliminating any structural changes. They’re requesting that customers make all selections up front and choose alternative products as a backup. In addition, builders are releasing purchase orders at the start of construction or before, and requesting that suppliers place their orders immediately to guarantee price and timely delivery. In a number of cases, home builders are paying for the material at PO release and even setting up warehouses to store that inventory. Meanwhile, manufacturers have been reducing selections and discontinuing product lines to streamline their supply chains. 

Over the last month, our Builder Partnerships organization has been seeing manufacturer price increases ranging from 8% to 12%. Most of those increases take effect on Jan. 1, but several price hikes have been immediate.

Extended construction schedules will cause builders to miss 10% to 20% of planned closings for 2021, which will be added to their already long backlog. One builder will start 2022 with a backlog of 550 sold homes, and many others will begin the year with more than half of their annual volume in backlog. So, while many builders increased gross profits by 2% to 3% in 2021, they will lose 2% to 3% in net profit because of missed closings.

Change of (House) Plan 

In response to the strong market of Millennial buyers, increasing construction costs, inflation of more than 6%, and increasing mortgage interest rates, builders are designing new single-family product with a smaller square footage, as well as offering attached and detached townhouses and fourplexes. 

This year should finish with the housing industry producing about 1.58 million homes. Total starts are anticipated to consist of 1.14 million single-family homes and 440,000 multifamily starts. 2022 is forecast to generate 1.75 million total housing starts, of which 1.25 million will be single-family homes and 500,000 will be multifamily. The multifamily segment is still strong, with builders in our network having effective full occupancy and rising rents. The increase in for-sale townhouses, duplexes, and fourplexes will add to multifamily starts. 

What’s Next for Housing?

My concern about 2022 isn’t housing demand, which will remain strong. I’m more concerned about how fast we can solve supply chain issues and address inflationary pressures. Consumers are flush with about $2 trillion in excess savings and are chasing limited supplies of goods and services. Inflation is running in excess of 6% and growing. The Federal Reserve has been slow in responding to inflation, which isn’t as transitory as they’d like us to believe. Rather, inflation is going to have a negative impact on mortgage interest rates, which will dampen housing demand. 

I’ve written a report titled, “The Roaring 2020s: Housing’s Best Decade,” and I produce a “Housing Economy 2021: Housing Chart Pack” each month. Both can be downloaded from builderpartnerships
.com or shinnconsulting.com. The charts take a historical perspective of the industry to allow for a long trend line perspective of current statistical information, and charts are updated monthly.

 

Written By

Charles “Chuck” C. Shinn Jr., PhD, has been dedicated to improving the management standards and profitability of the home building industry for more than 50 years. Learn more at shinnconsulting.com.

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