A close look at the kinks is homebuilders' supply chains — and what we can do about it.
There's not enough housing to go around. By some estimates, the American housing market is around 3.8 million units short of the inventory needed to house the population while maintaining a healthy vacancy rate.
While this is unwelcome news to homebuyers, it provides unique opportunities for homebuilders, particularly in the area of attainable housing (which is defined in detail below). However, homebuilders are meeting several supply chain challenges in their efforts to provide attainable housing.
This whitepaper will explore supply chain challenges for builders of attainable housing, outline ten root causes of supply chain knots in this industry, and provide mitigation strategies to protect investments in attainable housing.
Attainable housing is generally defined as a residence that is affordable enough to be purchased by individuals and households earning between 70% and 100% of the local median household income (as established by the U.S. Census Bureau). In this case, “affordable” means the monthly housing payment (including principle, interest, homeowner’s insurance, property taxes, and utilities) equals no more than 30% of the gross household income.
Attainable housing is often synonymous with the term “starter homes,” and may be narrowed further to homes of less than 1,400 square feet. In 1982, 40% of new construction homes were smaller than 1,400 square feet. By 2022, the figure had fallen to just 7%.
The availability of attainable housing has been declining for over a decade. It isn’t for lack of demand; a recent State of Homebuying Report from ServiceLink found that 63% of Gen Zers and 59% of Millennials planned to purchase homes in 2024. The issue is the limited supply of attainable housing.
While there are several factors contributing to the attainable housing shortage (including under-development in the wake of the 2008 financial collapse, Baby Boomers opting to "age in place" rather than downsize, and single-family investors buying up inventory), supply chain disruptions play a critical role in the lack of attainable housing for today's homebuyers.
With so many resources required for construction and development, supply chain issues can severely disrupt the homebuilding industry.
The remainder of this paper is dedicated to explaining the supply chain requirements for attainable housing, uncovering the root causes of the current supply chain disruptions, and exploring strategies for mitigating the risks of supply chain disruptions in homebuilding.
Attainable housing developments place many demands on the supply chain, including the following:
With these needs in mind, let us consider the current causes of today’s home builder supply chain disruptions.
We have identified 10 root causes of supply chain disruptions for home builders in 2024.
The marketplace is struggling to provide enough trained workers to meet the demand.
The National Center for Construction Education and Research (NCCER) reports that the US needs around 430,000 construction workers to fill the industry’s open positions. Unfortunately, employers are struggling to find qualified applicants. A 2023 survey conducted by the Associated General Contractors of America found that 68% of construction companies report that their job applicants lack the skills needed to complete the tasks required for the positions.
The current construction labor shortage is a result of multiple factors.
Firstly, the construction industry lost many workers to The Great Resignation in the aftermath of COVID-19. In the last quarter of 2021, an average of 197,250 construction workers were quitting every month. Even in 2024, construction quit rates sit right around 2% each month.
The comparatively high quit rate is largely due to the aging workforce. According to census data, the percentage of construction workers aged 55 and over nearly doubled between 2003 and 2020, going from 11.5% to 22.7%. Currently, more than one of every five construction workers is 55 and older, meaning that they are highly likely to retire within the next decade. By comparison, only 9.4% of construction workers are in the 16 to 24 age group (down from 13% in 2003). There are simply not enough new workers coming in to replace those who are leaving.
The lack of qualified new workers can be attributed to both stricter immigration policies and social expectations for higher education.
Census data confirms that one in four construction industry workers are foreign-born. However, changes in immigration policy have resulted in a more shallow pool of potential workers. The Trump Administration’s hard line on immigration, including visa freezes and a crackdown on undocumented immigrants, has contributed to the labor shortage. In 2017, Trump’s first year in office, the number of new immigrant workers entering the construction industry declined by a third.
At the same time, social expectations for college education have prevented many American-born workers from entering construction. In 1960, only 41.1% of Americans were high school graduates, and only 7.7% held a college degree. By 2022, 90.9% of Americans were high school graduates, and 37.5% held college degrees. With the Millennial and Gen Z generations pushed to get college degrees, rather than attend trade schools, younger workers are more highly educated than previous generations and looking to work in fields that align with their degrees. Younger workers are also more likely to be saddled with student loan debt than older workers. This debt necessitates higher-paying careers in which workers can earn enough to repay those loans.
Unfortunately, construction wages have not grown as fast as wages in other industries. Census data shows that the Employment Cost Index (ECI) for construction is 160.6 since 2005. This means that the value of compensation has increased by 60.6% since 2005. For comparison, the index average is 162.1. However, many industries are providing better prospects for workers. For example, the index for transportation and warehousing is 173.6 and the index for utilities is 167.2.
The limited availability of essential homebuilding materials such as lumber, steel, and concrete has become a challenge for homebuilders, particularly as the low supply is driving prices up. In fact, 63% of builders reported that building material prices were a key problem in 2023. The high cost of material shortages is of distinct importance for attainable housing projects, which must keep costs down to be profitable.
One large factor contributing to the shortage of materials is the slow return of production following the pandemic. Manufacturers and miners laid off employees and sold off equipment due to the economic uncertainty of the early pandemic era, leaving them without the manpower or infrastructure to quickly increase capacity. As a result, components needed for home systems are in short supply.
HVAC systems, for example, rely on lithium batteries, but lithium supplies are too low to meet demand. Benchmark Mineral Intelligence estimates a supply deficit of 300,000 tLCE (tonnes of lithium carbonate equivalent) by 2030.
The supply of materials is also greatly impacted by price volatility due to economic factors, logistical issues, global trade dynamics, and long-lasting pandemic-related disruptions, each of which will be discussed in detail as we explore more causes of supply chain disruptions.
Finding the physical plot on which to build is a supply chain challenge due to the inherent scarcity of land.
While the U.S. contains around 3.5 million square miles of land, only a small percentage of that space is available for development. Other land uses, such as agriculture, grazing, and forestry, take priority. Additionally, some areas, like swamplands, floodplains, and mountains, for example, are simply not ideal for home building.
It truly only makes sense to build where people want to be, which limits builders to land in and around established towns and cities. And, within that range, there is limited land available due to factors like zoning code restrictions.
One particular challenge specifically relating to attainable housing is finding land that can accommodate more than one dwelling. As single-family homes with private yards are more costly, many attainable housing builders are looking for large enough plots to fit rows of townhomes, which are in high demand due to their lower price point.
There is a string of logistical issues that can create knots in the supply chain for homebuilders:
Inflation and interest rates are always a factor in supply chains. But they are rarely as volatile as they have been in the 2020s. Inflation in 2022 hit 8%, prompting the Federal Reserve to raise interest rates to higher levels than we had yet seen in the 21st century.
Both have disrupted home-building supply chains.
Inflation pulled materials prices up untenably. Take inputs to residential construction as an example. During the four-year period from Q1 2016-2020, the cost of these inputs increased by 10%. However, during the following four-year period from Q1 2020-2024, the cost of these inputs increased by 38%. Other building materials were affected even more severely. Steel-mill products, for example, increased by 19% from Q1 2016-2020, then flew to 77% from Q1 2020-2024.
At the same time, higher interest rates have increased the cost of borrowing funds to finance construction projects. In February 2022, the federal funds effective interest rate (considered the economic base rate) was .08%, and had been since 2020. By Feb 2024, this rate was up to 5.33%.
Furthermore, rising interest rates have made attainable housing even more difficult to access by raising interest expenses for homebuyers, effectively pricing many buyers out of the market.
Trade wars directly impact the supply chain for American homebuilders, in terms of cost and availability of materials.
For example, the Trump-era trade war between the U.S. and China resulted in tariffs on many Chinese imports to the states, including home-building materials. One study found that trade-weighted average tariff rates for homebuilding products from China in 2021 were more than nine times higher than they were in 2017 (before the tariffs were enacted). Of course China isn’t the only nation on which tariffs are levied for home-building materials. The same study determined that the tariff rate for homebuilding products from all countries increased more than four times over the same period.
The trade war continues under the Biden Administration, with tariff increases on Chinese imports planned for 2024 and 2025. Certain steel and aluminum products, for example, will see an increase from 0-7.5% to 25% in 2024. The tariff rate on lithium batteries needed for HVAC systems will increase from 7.5% to 25% in 2024 as well.
Unfortunately, trade wars aren’t the only concerning factor in global trade dynamics. Geopolitical instability is also creating supply chain challenges for builders. Take the current conflict between Israel and Hamas, as an example. The increased danger in the region is causing transportation companies to avoid the Red Sea. The volume of container ships traveling Red Sea routes dropped by an estimated 75% as of January 2024, whereby causing extensive delays and increased transportation costs.
Local regulatory hurdles also vex attainable housing builders.
Building codes, for example, are ever-evolving and vary from one market to the next. Of particular consequence in the 2020s are more stringent energy codes. Studies estimate that building to the 2021 International Energy Conservation Code (IECC) can add over $30,000 to the cost of building a new single-family home. And, with the U.S. Department of Housing and Urban Development (HUD) requiring all homes purchased with FHA and USDA loans to be built to this code, the supply of attainable housing took another hit.
Another regulatory issue in the home builder supply chain is building permits. With new construction being ramped up in many parts of the country, the wait time for both permits and inspections has increased in many local markets, resulting in permitting delays that can stall construction projects. One estimate found that permit delays can add over six months to a build timeline and over $26,000 to the final purchase price.
Technological supply chain challenges are often more about lost opportunity costs from the failure to upgrade than from problems with existing tech.
New tech can be difficult to implement. There may be a large capital investment required, and established builders may be resistant to adopting new technology when they believe the current systems work. Furthermore, there may be integration issues as builders incorporate new technologies with existing construction practices and systems.
Natural disasters, such as hurricanes, earthquakes, and floods, can disrupt supply chains and damage infrastructure. And these events seem to be increasing in frequency.
Resource depletion is another environmental factor in the supply chain as the over-extraction of natural resources necessary for construction materials depletes the supply and drives the price up.
Global supply chain challenges were all exacerbated by the 2020 Covid-19 pandemic.
In the spring of 2020, governments around the world ordered non-essential workers to remain home to prevent the spread of the virus among workers.
Manufacturing plants were closed and production was paused. Re-starting production proved to be more difficult than stopping production, particularly with a backlog of orders to fill. We’re still feeling the effects of this dramatic supply chain disruption four years after the initial outbreak.
As there are challenges associated with construction supply chains in today’s environment, there are also many ways in which to mitigate risks to enhance investment resilience and protect returns in attainable housing.
Building housing tailored to today’s homebuyers creates demand for the finished product. Today’s attainable housing buyers are looking for smaller homes on smaller lots. Not only are these residences more affordable to purchase, they’re also easier to heat and cool, and they require less maintenance.
This is perhaps why townhomes have become so popular. Nearly 13% of all single-family starts are comprised of townhomes. This represents 38% growth over just one year.
Finding land for such a project may be difficult, but there are partners to help. The True Life Companies, for example, specializes in locating and repurposing urban infill areas for residential development. By assuming control over high-potential real estate, such as neglected commercial parcels that have outlived their useful life, TTLC can design site plans for new communities and sell shovel-ready parcels to builders.
This innovative strategy is creating useful attainable housing from wasted spaces.
With regard to inventory, some homebuilders are making just-in-time (JIT) adjustments to minimize lag time and waste. Others are opting for buffer stocks of critical materials to cushion against supply chain delays. The better option for a given builder depends on the reliability and responsiveness of their supply chain.
To keep the supply chain of materials flowing smoothly, builders are focusing more on local sourcing. Getting materials from nearby providers reduces risks related to transportation.
In addition to the pipeline of construction materials, builders are looking to build lasting relationships with real estate experts who can scout, vet, and prepare lots for development. The True Life Companies acts as a strategic supply chain partner, giving homebuilders access to a reliable source of lots for new housing. The repeatability and scalability provided by this arrangement reduce risk and increase efficiencies for builders.
Investing in training programs and partnerships with vocational schools can help create a steady supply of qualified workers. Competitive wages and good working conditions can also attract more talent to the construction industry.
Diversification is a classic risk-management strategy. Rather than investing everything into a single project, diversification allocates resources among multiple projects. If one project should underperform due to uncontrollable circumstances, the others can bolster the portfolio as a whole.
Additionally, adequate insurance coverage relating to property titles, inventory, and transportation is crucial in providing a level of financial protection.
Implementing sustainable building practices and materials (such as solar power, green insulation, and cool roofs) reduces environmental impact and attracts ESG-focused investors.
Builders can also improve ESG by working with the community to address local concerns. A mixed-use development, for example, may provide convenient amenities that the residents would appreciate. Goodwill from the community can make for a smoother build.
Finally, actively lobbying for streamlined permitting processes and less stringent regulations can make for a smoother building process. Easing regulations has proven to boost housing supply and affordability. California, for example, is making it easier for property owners to add to the housing inventory through ADUs on single-family parcels. ADUs (accessory dwelling units) effectively allow single-family lots to house two households.
Reducing the regulatory requirements and permit wait times mitigate the risks of going over budget or over schedule.
Analyzing the potential risks of supply chain challenges and creating contingency plans to address them can help a builder recover more quickly from an incident.
A strong supply chain contingency plan addresses the 10 root causes examined in this paper and outlines appropriate responses to each should future occurrences arise.
Today’s homebuilders face many supply chain challenges but are rewarded with many emerging opportunities. Recognizing the supply chain challenges for home builders, understanding their impact on the housing market, and implementing risk mitigation strategies will leave us with a solid foundation for successful and much-needed attainable housing investments.
The True Life Companies has the understanding, experience, and capital needed to help unravel the supply chain knot and connect investors with build-ready opportunities to improve the overall supply of attainable housing.
Contact TTLC today to find out how.