Home construction sees biggest drop since pandemic hit. Here’s why

Despite a historic shortage of homes for sale, homebuilders are actually slowing production, handcuffed by skyrocketing commodity prices and shortages of land and skilled labor.

 Single-family housing starts dropped more than 13% in April compared with March, the U.S. Census reported Tuesday. That’s the sharpest decrease since last April, when the pandemic shut down the economy.

 “I have to blame the difficulty in procuring lumber and other products, along with labor issues for the miss, in addition to likely cancellations due to skyrocketing costs for single family starts,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

 Prices new and existing homes are at record levels, and the increases are accelerating at the fastest clip in over 15 years. Nearly half of all builders say they are adding escalation clauses to their sale prices because of rising material costs, according to a recent survey from the National Association of Home Builders.

 “Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder’s control,” according to a recent NAHB post.

 In a monthly sentiment survey, they also noted that builders said they were slowing production in order to deal with higher costs for lumber, steel, gypsum and copper, some of which have hit record highs this year. A broad mix of residential construction materials is up in aggregate 12.4% over the previous 12 months, according to the producer price index. The NAHB estimates that the increase in lumber alone has added $36,000 to the cost of building the average single-family home.

The industry is also dealing with a shortage of labor. Construction employment stalled in April and fell below it’s pre-pandemic peak, according to the Bureau of Labor Statistics.

“Contractors are experiencing unprecedented intensity and range of cost increases, supply-chain disruptions, and worker shortages that have kept firms from increasing their workforces,” said Ken Simonson, chief economist with Associated General Contractors of America, an industry trade group. “These challenges will make it difficult for contractors to rebound as the pandemic appears to wane.”

Roughly 15% of builders said they are putting down concrete foundations and then holding off on framing the house. This counts officially as a “start” according to the Census monthly figures, but it doesn’t create a house.

 Supply-chain issues are also filtering down into all the things that go into a home.

 “Builders are also reporting difficulty obtaining other inputs like appliances,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association. “These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fueled by an improving job market and low mortgage rates.”