It should come as no surprise that residential construction is among the strongest sectors of the entire economy right now, with new-home sales up 19.3% from January 2020 to January 2021. However, the very conditions that have accelerated home sales—the COVID-19 pandemic chief among them—have also led to a shortage of building products.
Across all categories, prices paid for goods less energy rose by 6.8% over the 12 months ending in January 2021, according to the Producer Price Index report by the Bureau of Labor Statistics. Lumber prices have led much of this charge, as prices per thousand board feet have climbed to the $1,000 mark.
While COVID-19 has touched every step and product type in the home construction process, appliances stand out for their wide-ranging impact. In the February 2021 NAHB/Wells Fargo Housing Market Index survey, nearly 90% of builders reported difficulty obtaining appliances over the past six months—51% to a major extent and 38% to a minor extent. One builder reported that his appliances had been on back order for months.
As it stands today, the three main factors in the ongoing building supply shortage are an outsized demand for new products, pandemic-related struggles in manufacturing, and a concurrent demand for new homes.
“In Houston, we’ve been faced with a tremendous and, frankly, completely unexpected uptick in housing demand,” says Lawrence Dean, regional director for the Houston market at Zonda, BUILDER’s parent company. “At the same time, the manufacturers and distributors of appliances, and really all kinds of building materials, are having difficulty being able to produce even at a normal rate of production, much less this elevated rate that’s needed right now.”
Demand for New Products
“When people spend more time at home, they’re using their appliances so much more. So it’s accelerating the replacement cycles,” says John Taylor, senior vice president of public affairs and communications for LG Electronics USA. “But the more time people spend at home, they’re kind of reevaluating their home life and upgrading their kitchens and laundry rooms, focusing more on healthier living, looking for features like sanitization in their wash cycles or in their dishwasher, and focusing on energy efficiency and green living. So there are all these trends that play right into the appliance business.”
Other consumer demands have come as a direct result of the COVID-19 pandemic. For example, when the lockdown began, major retailers sold out of chest freezers as many households stockpiled food.
According to data from Zonda, remodeling and replacement spending in home improvement rose by 19% in 2020, or $27 billion in revenue. Much of this is concentrated in home improvement retail; professional retailers saw only a $0.5 billion increase in revenue from remodeling.
Obstacles in Manufacturing
In any environment, a sudden and unexpected surge in new product orders would place a large amount of strain on a building product manufacturer and create delays in the finished product. Because of the surge spurred by COVID-19, this demand is happening across almost every part of the supply chain all at once.
“LG is fortunate because we do have a variety of different plants around the world, so we’re able to maximize our supply chain to offset any shortages, generally,” Taylor says. “Not to say that we don’t have some, because we do. We just can’t keep up with demand, even working overtime.”
This is compounded by the changes necessitated by COVID-19 safety protocols, particularly physical distancing, as manufacturing capacity shrinks when fewer workers are allowed in a space. In the worst-case scenario, a COVID-19 outbreak among factory workers can shut down entire supply lines, throttling the factory’s capacity and creating even longer delays.
“Maquiladora plants in Juarez, Mexico, have struggled to operate at full capacity due to the coronavirus spread,” says Ben Sage, senior regional director at Zonda. “One of these is an Electrolux plant, which supplies appliances for many builders in the states. The industry has pivoted to other providers, but demand is up overall—home building, consumers, etc.—and it is stretching an already challenged supply chain.”
Dean reports the same issues with suppliers of windows, doors, and kitchen cabinets to the Houston area, most of which are produced semi-locally, within 150 miles. “Those production lines were just having tremendous difficulty keeping an even flow of production, because of workers getting sick and having to shut down and pause and sanitize everything,” he says.
If products or components come from overseas, freight is another major obstacle. In a January 2021 article, CNBC Asia markets editor Weizhen Tan reported that spot freight rates from Asia to the United States had skyrocketed since March 2020, and an imbalance in imports and exports had created a shipping container shortage in China.
Demand for New Homes
A major source of material demand—and strain on supply lines—is the housing market, which is still running hot. Interest rates remain low, demographics hold strong, and buyers are looking for a change, acting on many of the same wants and needs that led other households to remodel.
In a vicious cycle, intense demand coupled with a shortage of available materials has left builders struggling to complete homes quickly enough to keep up with buyer interest. “In 2020, we saw a 20% increase in home sales [in Houston] versus 2019, and 2019 was a really good year,” Dean says. “Nobody, going into 2020, forecasted this. Appliance makers certainly weren’t planning on dialing up production to satisfy a 20% ramp-up in demand.”
In some cases, according to Dean, builders have asked buyers to pick out their new-home appliances within seven days of the contract signing, in the hopes that they will arrive by the time the home is closed months later. In others, according to NAHB’s Paul Emrath, a builder may sell a house without including certain appliances, instead leaving it to the homeowner to supply them.
Another concern is present and future lot availability. If a builder sells homes too quickly, they run the risk of “gapping out,” or selling out of their lot supply with little to fall back on for the future. As a result, a growing number of builders are limiting the pace of their sales, some to four or six per month, per subdivision. This is in an effort to keep supply steady, avoid pulling in future demand, and preserve the customer experience as much as possible.
“Right now, demand [in Houston] is so high, and the market is so hot, that they could sell as many homes as they ever wanted to,” Dean says. “But they risk having that home buyer have a terrible experience, and that might not be a function of that particular building company so much as too many homes being built in a challenging operating environment. So now builders are keenly aware that if they sell a house to everyone who wants one right now, the buyer may have a poor experience that they’ll remember for 25 years.”
How Long Will It Last?
Dean anticipates that 2020’s sales value represents a cycle peak and forecasts as much as a 10% decrease in year-over-year sales in 2021—not because demand will fall, but because builders do not have the lot or material capacity to deliver any more product. By 2022 or 2023, he expects a return to normal, or slightly below normal if demand has been pulled forward.
On the manufacturing side, Taylor predicts a similar pullback. “This level of demand can’t continue forever,” he says. “We’ll probably get back to some level of normalcy starting in the second half of the year. But that’s more on the retail channel. We see the housing market continuing to pick up steam and getting back to the growth trajectory that was forecast before the pandemic hit.”
