When the COVID-19 pandemic began spreading widely in spring 2020, there were many dark predictions about the impact on the economy. Even after the initial lockdowns were lifted and Congress passed the CARES Act to assist consumers and businesses, there were few forecasts that were rosy about 2021 and beyond. But the rollout of effective vaccines unleashed an unexpected boom in demand in 2021, boosting the economy and easing worries that the pandemic would wreak long-term financial pain.

The unintended consequence of the surprise boom was a different sort of short-term pain. As Americans re-opened their collective wallets in spring 2021, they found that little of what they wanted to buy was available.

The housing market was way ahead of the curve, having seen a boom in home improvements beginning in summer of 2020 when homeowners were spending most of their time at home. By the end of 2020, building product prices were beginning to rise quickly and had become scarce. Lead times on materials, products, and equipment for residential construction lengthened to four or five times normal. Some items were backordered for periods of time that were longer than the time it took to build the house.

Then came the Delta and Omicron variants, throwing monkey wrenches into what small recovery was underway in the global supply chain. In short, 2021 was a mess for suppliers.

At the midpoint of 2022, it is clear that the supply chain still has a long way to go before looking anything like “normal.” There are signs that manufacturing and transportation are beginning to increase, however, and most distributors have figured out ways to fill the gaps that exist in their long-time network of suppliers. The data on housing starts and existing home sales (which typically spur renovation projects) showed that both slowed significantly in May, with indications that the market could be 10 percent slower than in mid-2021. As the Federal Reserve Bank raises rates to combat inflation, economic demand is slowing. While that could mean a recession later this year, a slowdown would accelerate the improvement in the supply chain. That would be welcome news for the home construction market.

The Downstream Effects

There are two key outcomes from the disruption of the supply chain: longer construction schedules and higher prices. Of the two, the former is more strongly correlated to the supply chain. Even the best homebuilder cannot manage what is outside its control. Construction will take longer today than five years ago because there are fewer skilled workers; however, builders can manage labor issues. It is the long lead times associated with the broken supply chain that are wrecking schedules.

Short supply certainly has an impact on price. Distributors readily agree that the demand for materials far outstrips what they have to sell. But escalating home prices have much more to do with the imbalance in the supply and demand of existing homes to sell than the cost of new construction. Roughly six times as many existing homes are sold each year compared to new construction. In fact, were the inventory of homes for sale to swell suddenly – it is currently just above two months’ supply – the price of new construction would have to react accordingly, regardless of what material costs were doing. This unusually tight supply of homes for sale, compared to the unusually high levels of demand, will not be undone soon. National Association of Realtors Chief Economist Lawrence Yun recently estimated that there were three-to-four million homes short of meeting demand. That is three years’ worth of new construction at full capacity.

Where the supply chain disruption has impacted price most directly is in the home remodeling market. The pandemic sparked a dramatic increase in remodeling and additions to existing homes. Homeowners spent more time in their homes in 2020 and decided to invest in making those spaces more to their liking. This spike in demand made headlines by tripling the prices of soft from February to September 2020, when prices hit almost $1,000 per thousand board feet. (The price subsequently topped $1,500 again in May 2021 and 2022.) But lumber was hardly the only material impacted. Prices for all products that are inputs to residential construction have been 25 percent higher year-over-year for nearly 18 months. 

You can make the argument that inflation is less disruptive to residential construction than the long lead times that are a result of the same supply-demand imbalance. High inflation had most certainly caused some new construction buyers to walk away from deals, but builders have been so busy that the loss of future business has not yet been painful. The long lead times for most products, on the other hand, wreaks havoc on schedules. That makes customers unhappy. It also erodes the profit a builder expects to make on a new home.

Homebuilders are roughly categorized into two categories: custom and production. The latter type of builder, which is able to construct a higher volume of homes because of predictability and repetition, has the higher market share in metropolitan Pittsburgh. As might be expected, the unpredictability of a fractured supply chain can play havoc on the production-oriented builder, especially since those builders typically deliver a new home in six months or less. 

The region’s biggest builder is NVR, led by its Ryan Homes brand. As demand began surging in mid-2021, Ryan Homes added 30 days to its delivery times on new sales and accelerated the deadline for decisions on materials and finishes by its customers by 30 days. That decision-making period could coincide with the time needed to complete the financing arrangements, adding about two months to the construction schedule without the homebuyer feeling any delays.

“We learned to manage it after a painful lesson. What happened last year caused delays in projects. I made customers unhappy,” recalls Jeff Costa, founder of Costa Homebuilders. “When we started new projects after that, we shifted gears and have ordered everything sooner. As soon as someone signs a contract, we are ordering windows and garage doors. Those are things that we wouldn’t have ordered until much further into the project. We became better organized but there was a time last year when we felt the pain. It’s not improving so much as it is changing. There are different shortages.”

Regardless of the strategies employed to manage the supply chain uncertainty, builders are still ultimately captive to the suppliers. Depending upon the product or material, lead times expanded dramatically from winter to spring 2021. The booming economy and continued surges of COVID-19 kept those lead times extended well into the 2022 building season. As the first half of 2022 ends, distributors are seeing some signs of easing but little sign that normal is approaching.

“For the majority of products, lead times have come down and some of them significantly. It depends on if the manufacturer is struggling to find a vendor for one component or another,” says David Jones, president of Brookside Lumber Company. “For example, we had Andersen Windows in one of their categories that was out a year a few months ago. Now they are down closer to three or four months, which is still a long time relatively speaking. I think they were heavy-handed on the lead times because they didn’t know whether or not they would get some of these components and materials they needed to manufacture.” 

Tom Baney, president of Standard Air and Lite, believes that same dynamic was the reason that lead times had improved dramatically for residential HVAC equipment. Standard Air and Lite is an exclusive distributor for Carrier Corporation, which extended its lead times from two weeks to over 100 days very early in the 2021 recovery that followed widespread vaccination.

“Two steps forward and two steps back is a good way to describe it. It depends upon the segment you’re talking about,” he says. “For example, on the residential side, where things were really bad last year, Carrier still has us at 120-day lead times, but they have shipped so much earlier that we now are flooded with inventory. I know they are better than the published lead times, but they are not committing to shorter times yet. It’s now 90 degrees so the full inventory is beautiful. Heat pumps are becoming difficult to get but that’s a national problem.”

Candice Brown, co-owner of Thomas V. Giel Corporation, is less sanguine about conditions. She says that what would typically take two or three weeks to deliver in 2019 is now taking as long as six months, with the average manufacturer taking 15 to 35 weeks for delivery. It is worth remembering that garage doors are manufactured as components that the distributor, like Thomas V. Giel, assembles and installs at the home. 

“I don’t see an end in sight, unfortunately. It’s not going to be something that goes away for at least a few years, according to our suppliers, Brown says. “The snags are with the door manufacturers. For the past two years, something would interfere with making the door itself. At first, they couldn’t get raw steel from the port. Then they couldn’t get staff. Then they couldn’t get the urethane foam and adhesives. Every part that makes up a door was on backorder at some point, which held up the entire process. Our manufacturers have told us if no one placed an order for a year, it would take another year to get caught up.”

“Our lead times are pretty flat. They are the same lead times as they have been all year. I would say that the times are less on some raw materials like aluminum, but delays are still a factor,” says Rick Hangliter, regional manager for Gunton Corporation, the largest independent distributor for Pella Windows in the U.S. “Pella is putting every conceivable resource into procurement and throughput but there is no end in sight for this.”

Hangliter expressed frustration at having to tell homeowners and homebuilders news he would not have had to give three years ago. He knows that Gunton and Pella are losing opportunities because of the realities of the lead times. Hangliter laughed when asked about what steps a distributor can take to manage the situation, noting that buyers have begun to shop based upon where they can get the shortest lead time, which leaves the suppliers that get those orders so busy that their lead times lengthen again. 

A sampling of lead times published by various multi-state distributors reveals how uneven the supply landscape is. Manufacturers of lower-quality standard windows are filling orders within four weeks, while makers of custom windows are anywhere from 12 to 60 weeks. Insulation, caulking, adhesives, and some types of siding are on allocation. Vinyl siding has become more available – many of the colors were off the market earlier in the year – but lead times vary wildly. Colored coil for siding and flashing is available from 45 days to three months, depending on color and gauge. Some manufacturers have adopted a strategy of focusing production assets on fewer products to increase what is available.

“Our roofing supplier shifted its inventory from 10 colors to five colors,” says Costa. “They focused on the five best-selling colors to have as much as possible.”

Hangliter pointed to a trend in residential window architecture that is likely to help with capacity. Homeowners are demanding more natural light in their homes and builders have responded by designing much larger, fixed-glass windows in the front and rear. That has created a surge in demand for larger windows, for which glass manufacturers were unprepared. Hangliter reports that one of the nation’s largest residential glass manufacturer, Cardinal Industries is preparing to add an additional glass furnace to meet the demand.

“Window manufacturers buy glass from just a few manufacturers, so that would help add significant capacity to the industry at a critical time,” he says.

The Light at the End of the Tunnel

For the time being, few of the distributors and builders expect to see a significant improvement in the residential building product supply chain this year, and most are not optimistic about a return to pre-pandemic normalcy in 2023. Those points of view are from professionals in the midst of the battle, so to speak. There are some factors to consider that would restore some optimism.

The first, conversely enough, is the likely recessionary outcome of the Federal Reserve Bank’s belt tightening. Fed Chair Jerome Powell is unlikely to ever list a recession as the goal of the rate hiking and balance sheet reductions that have been ongoing since March; however, the Fed regional presidents have gently acknowledged that a slowdown in demand is the aim of the tighter policy, whether that results in a recession or not. The risk of the recession was made necessary by the delay in responding to the supply chain problems in 2021.

“I think it’s going to be a combination of things settling because some of the kinks being worked out and the Federal Reserve slowing things down,” says Jones. “I don’t think that has had a lot of impact yet, but I believe it will. I fear the Fed will swing us from one problem to another.”

“I think interest rates are going to cool off new home construction fairly quickly, at least at the entry level,” predicts Hangliter. “The production type of builder is going to slow down quicker than a custom builder working for somebody who has money in the bank. But we’re just not seeing any of that yet because there’s enough in the pipeline.”

The data from the past two months suggests that residential suppliers will be seeing a slowdown in orders soon. New home construction slumped 14.4 percent nationwide in May from April. Permits for new housing units topped 1.8 million in April, following a surprising uptick in starts in March. Single-family starts were 1.05 million, with multi-family starts falling to 498,000 units. Sales of new homes plunged significantly in April, the fourth consecutive month of declines. Declining sales reflect concerns about rising mortgage rates and reflect a further decrease in affordability.

In metro Pittsburgh, permits for new homes slowed to an even greater degree in April and May. Construction starts for new single-family detached and attached homes was off by nearly six percent during the first quarter of 2022; by the end of May, the decline was 22.9 percent year-over-year. That is the kind of decline that accompanies a recession.

Recessions are never welcome, but they reflect an imbalance between supply and demand that requires correction. In most cases, recessions stem from an oversupply that did not anticipate cooling demand, which is 180 degrees from the current situation. For the supply chain, a significant slowdown in demand offers the chance for suppliers to catch up and build inventories. A recession would likely bring cancellations of orders, a trend that would accelerate the re-balancing of supply and demand.

There are some indications that the pullback has begun. One of the world’s freight-tracking metrics, the Baltos Freight Index reported in mid-June that freight rates for shipping from China to the U.S. had fallen 34 percent from the beginning of 2022 and were 50 percent lower than June 2021. Global shipping rates are closely linked to supply and demand, which has been disrupted by COVID-19 for two years. The surge in demand in 2021 outstripped the availability of both shipping containers and shipyard workers. Throughout the spring of 2022, demand has been slowing and importers have been cancelling orders from China. 

One caveat to any measurement of global freight is that the impact of the shutdown of Shanghai, which is home to the second largest port in the world, from April into June has yet to be fully discovered. Likewise, the disruption caused by the war in Ukraine will create uncertainty about supply until the conflict ends.

Shipping and delivery costs have added significantly to the overall inflation in residential products and materials. Much of that increase can be attributed to the high cost of fuel, but a continued decline in freight costs will pare a few percentage points off the overall rate of residential construction inflation. Moreover, the drop in freight demand is an early sign that suppliers will get a chance to rebuild inventories. 

Jones shared that pricing for some of the highest volume materials, like lumber and steel shapes, have been pulling back recently, falling 20 to 30 percent. Building materials are cyclical, and lumber has been especially volatile since mid-2020; however, Jones notes that the softer pricing is likely an indicator of softer demand. It may be another canary in the coal mine, foretelling an easing of the extraordinary manufacturing backlogs.

In the meantime, distributors continue to be creative to continue to have products and materials for their customers. That is especially true for residential service businesses, which require sufficient inventories of parts and consumable materials to keep homeowners happy. In the past, there have been shortages of parts or components that helped drive sales of new equipment or products. If there was a shortage of replacement compressors, for example, homeowners would be inclined to replace the air-conditioning unit rather than swelter in the heat. But, in today’s environment, there is no inventory of new product to replace the old. Candice Brown says she has broadened the base of parts suppliers.

“The shortages absolutely affect our service business. I can’t get certain kinds of springs, track, garage door openers and components to complete the job,” she says. “I used to have only four or five suppliers for springs and now I have over 20.”

Baney is looking ahead to September already and is not waiting to see how well Carrier has adjusted to meet the demand for furnaces when the cold weather hits.

“We’re ordering furnaces now because I don’t trust the situation to get better,” he says.

Baney’s caution is understandable given the unreliability of the supply chain since 2020. It seems more likely that economic conditions will ease some of the uncertainty about supply in the coming winter. Suppliers are rebuilding capacity. Pressure on oil and gas companies to build inventories will continue to grow through the busy summer vacation season, and that has historically been persuasive. Lower fuel and energy prices would help with inflation and make the costs associated with building manufacturing capacity less painful. And the path of the Federal Reserve Bank is set on stamping out inflation now, even if that means reversing growth for the short term.

The pandemic that started in spring 2020 turned the global economy upside down. It is easy to forget at this point that the U.S. economy was slowing dramatically at the start of 2020, and other parts of the world had already seen declining growth. COVID-19 was an artificial economic stop that preceded an artificially induced economic boom. The supply chain froze. The labor market broke. Instead of slowly regaining momentum that would result in increased job creation, the U.S. economy found itself needing twice as many workers as the number of people unemployed. That is a huge cushion against rising unemployment when the economy cools.

Conditions like this are literally unprecedented, at least for the past century. Setting aside the emotional pain humanity has experienced over the past two years, the economic pain from the pandemic has been very limited, especially compared to what could have been experienced without the massive government intervention. One of the more painful effects of the pandemic has been the inability of businesses to get what they need, when they need it. As the worst of the public health crisis begins to fade in summer 2022, it is clear there will be some economic pain to come before we transition fully back to whatever will become “normal” again. 

Whatever form that economic medicine takes, it is sure to cure what ails the supply chain too. For homeowners and the residential construction market, the cure cannot come too soon.  NH