The home stretch

The rest of the planet may be upside down, but life in the housing industry could hardly be better. After a year when absolutely nothing in Americans’ lives was even remotely close to normal, housing finally returned to normal.

Maybe even better than normal—the numbers look like 2006 all over again.

U.S. existing home sales in December landed at 6.65 million annualized. New home sales were 835,000 while housing starts came in at 1.68 million. In January, starts dipped to 1.58 million but permits rose to 1.89 million. Existing home sales rose to 6.69 million; new home sales came in at 923,000.

Just like December, 2020's year-end numbers were all personal bests since 2006. Existing single-family home sales finished 2020 at 5.64 million while new home sales were 811,000. Housing starts were 1.38 million even though home builders hit the pause button for two months last spring.

So are we finally out of the woods? Sure looks that way.

By all accounts, the U.S. economy is poised to break out like a Broadway musical as soon as enough people have been vaccinated that Americans can once again shop til they drop. ISM’s Services PMI rose to 58.7% in January. The index fell back to 55.3% in Feburary, but anything over 50% means the sector is expanding. “Numbers above 55% are usually a sign of broad strength,” notes MarketWatch.

Last summer the Congressional Budget Office projected that GDP would return to its pre-pandemic peak by mid-2022. Now CBO says we’ll be there by the middle of this year.

Likewise, the consensus forecast from economists polled by the Wall Street Journal is for 4.9% annual GDP growth in 2021. If that happens, it would make this year the strongest growth year since Ronald Reagan last ran for office.

Chances are the housing market will just get hotter. We were spared most of the economic pain of the pandemic because we landed on the right side of the much-discussed K-shaped recovery. Nearly nine out of ten Americans with incomes over $100,000 per year—i.e., prime candidates for homeownership—kept their jobs.

COVID is driving them to seek secure shelter, and thanks to the virus they have plenty of cash for down payments. The U.S. savings rate normally hovers between 5% and 10%. With Starbucks and Disney World out of the picture, over 17% of personal income went into the bank in 2020.

Throw in record-low mortgage rates and it’s no surprise that the supply of for-sale existing homes has fallen to 1.9 months. That’s another record, and with inventory that low, it’s also no surprise that home prices have now officially exceeded their 2005 peak during the housing bubble.

So far at least, buyers haven’t flinched. The word is that interest rates may rise a little in 2021, but analysts say a small increase will just cause “panic home buying as buyers rush to lock in a low mortgage rate.”

If demand still isn’t juiced up enough for you, the Biden Administration wants to give first-time home buyers a $15,000 tax credit. The credit would be structured so it can be used as a down payment at closing. That suggests that the target audience is young and lower-income buyers who have been left out of the market so far.

You may wonder whether those folks are in position to buy homes at all after last spring. Actually, even people who lost their jobs to the pandemic are doing better than expected. Two out of three laid-off workers who actively looked for new jobs found them—and nearly 60% of that group says they make more money now than they did in the old job.

All things considered, housing looks to be facing the proverbial perfect storm of demand. We’re going to have to find something new to worry about, for example: How in the world are we going to get all those houses built?

Pain, no gain

Every year, NAHB publishes a list of home builders’ top ten complaints. For the better part of the past decade, builders have been saying they can’t build enough homes to meet demand due to crippling shortages of lots and labor.

In 2019—when housing starts were a mere 1.29 million—a whopping 87% said they were getting killed by the cost and availability of skilled trade labor. 66% claimed building material prices were doing them in while 63% said the cost and availability of lots was killing them.

By rights, builders ought to be deader than Monty Python’s parrot by now. Instead they spent most of 2020 building homes at an annualized pace of 1.4 to 1.5 million. By December they were on track for nearly 1.7 million starts, while last month they pulled permits for just shy of 1.9 million annualized units.

NAHB’s latest top ten list just came out and it won’t surprise anyone to learn that building materials are now a runaway favorite. 96% of builders said material prices were their No. 1 headache in 2020 while 78% cited availability and lead times.

Everyone knows COVID is the culprit. Forest producers got caught flatfooted when the virus first hit. Now the pandemic has supply chains tied up in knots all over the planet.

Nothing to do except wait it out, but as John Burns Real Estate Consulting’s Todd Tomalak points out, we’ve been here before. The same thing happened to lumber prices in the wake of the Spanish flu pandemic in 1918-19. It’s a safe bet that prices will return to normal once the pandemic is in the rearview mirror.

But outrageous material prices have apparently given builders a new appreciation of how lucky they are to have land shortages. The raw number of available lots is still falling after five years of steady declines, but the percentage of builders who say that’s a serious problem dropped from 63% to 48% last year.

Again, there isn’t much that can be done. Control over land development is local and NIMBYism is a real thing. The only encouraging news is that remote work is turning out to be a real thing, too.

San Francisco, Seattle, and San Jose have all dropped off the list of top-performing metro economics in the past year “as the pandemic prompts people to move from pricey superstar cities to mid-tier ones where life is cheaper and easier,” says Axios. Places like Salt Lake City, Nashville, and Huntsville are reaping the benefits and that’s great—nothing wrong with spreading the wealth.

Unless you’re a NIMBY property owner in a superstar city. In San Francisco, where the median single-family home price is a cool $1.5 million, home values fell 7% in December alone. Rents have fallen 23% in the past year while up to 3% of the city’s residents have moved away.

Might be that a shrinking tax base will be the wake-up call overinflated metros need to come back to Earth. If not, no problem. You’ll love Salt Lake City.

What about the labor shortage? This one is just plain curious. The share of builders who say labor is a serious problem nosedived 22 points last year, from 87% to a measly 65%. You would think they must have finally found a viable solution to a problem that has plagued them for decades. If so, you would be wrong.

Actually there is no labor shortage. We’ve got more electricians, plumbers, and HVAC techs today than we had at the peak of the last housing boom. In 2019 starts were 38% below the 2005 peak. The number of roofers and siders was down 10%, finish carpenters were down 22%, and drywallers were down 34%.

The closest thing to a true shortage is in framing. Until last year, the number of framers per square foot built was only slightly off its 30-year average. Employment growth couldn’t keep up with starts so the ratio fell in 2020. Framers’ output still rose 10%, from 2.23 billion to 2.45 billion square feet.

Maybe builders’ labor woes aren’t quite the big deal we think they are. Could be that when they say they can’t find skilled labor, what they mean is that they can’t find it at the prices they’d like to pay. Welcome to the club.

Guessing games

This may be the worst possible time to try and forecast the next three to five years in housing, not that it'll stop anyone from doing it. But suppliers need to game out scenarios at the very least, to decide where to deploy assets.

Everyone knows what will happen if the virus throws us another curveball: We’ll hunker down and complain about it until it goes away. But what if all the current optimism turns out to be justified? Here’s a scenario that may not be extreme:

In 2019, total housing starts were 1,289,900. 2020 came in at 1,380,200, but we had two very bad months in April and May. The other ten average out to 120,020 starts per month. Based on that, total starts in 2020 would presumably have been 1,440,240 if not for the pandemic.

1.44 million would have been an 11.7% YoY increase. That’s exceptionally strong; annual housing starts have risen by double digits only 13 times in the past 60 years. But we’ve also been underbuilding relative to the population for an exceptionally long time.

If 11.7% annual growth is sustainable for four years, total housing starts would top 2.1 million in 2024.

That growth rate may not be sustainable, but if not, it won’t be for lack of demand. The limiting factor will be how quickly the industry can ramp up production.

At least at first. The U.S. median price-to-income ratio rose from 3.27 in 2011 to 4.29 in 2019 according to the Harvard Joint Center for Housing Studies. Home prices rose another 15% in 2020 so the ratio is probably close to 4.5 at this point.

That’s a 38% increase in ten years. Sooner or later we’re going to run out of home buyers with six-figure incomes. When it happens, builders will pivot to affordable housing. Suppliers need to be prepared to pivot with them; how you invest today could have a big impact on how competitive you are five years from now.

If speed was the only consideration, prefabrication would absolutely be the future of framing. Wall panels can reduce jobsite framing time by 60%. A fully-panelized European system such as Entekra’s FIOSS™ (walls, floors, and roof) cuts framing time by 80%.

The obstacle is that panels cost more. How much varies, but the rule of thumb is that wall panels add about 10% to the cost of the framing phase (material and labor) assuming the supplier gets paid for his extra work. FIOSS™ appears to add about 20%.

Prefab proponents argue that builders will make their money back in reduced cycle time. That’s generally true in multifamily construction, where you have plenty of repeatable assemblies to maximize design and manufacturing efficiency. Plus, cycle time is especially critical in multifamily since most buildings will generate revenue as soon as they’re completed.

Panels don’t pencil out as easily in single-family. A 10% increase in the cost of the framing phase reduces the net margin on a project by a full percentage point. To recover those dollars, a builder has to build and sell 113 homes in the time it would have taken to sell 100 stick-framed homes.

Wall panels alone won’t boost production by 13%. Framing accounts for just 12% to 15% of total build time when you stick frame, so the true savings with wall panels are 7% to 9%.

FIOSS™ can reduce total cycle time up to 33% by eliminating bottlenecks for all the trades, but paying 20% more for framing shaves two points off net margin. In order to break even, you’ll have to sell 131 homes in the time it took to sell 100.

Obviously some builders will use panels even if they do cost more. For example, maybe waste is a hot button. Framing waste on a typical stick-framed home is only about 5%, says NAHB, but it can be a lot higher with an iffy framing crew. Prefab reduces waste to a reliable 2% to 3%.

Nevertheless, most single-family builders are not drinking the Kool-Aid. According to Home Innovation Research Labs, the market share held by wall panels in single-family construction was just 9% in 2010—and has since fallen to 4.8%. Over half of HIRL’s survey respondents said they’ve tried panels and don’t plan to continue.

The lesson is that a panel plant is a great idea if you’re in the multifamily business—maybe even a prerequisite before long. But if you build a plant, you need to get into multifamily if you aren’t already there. So far single-family is icing on the cake.

That may not always be the case. When affordability becomes the No. 1 priority, single-family homes will most likely get simpler and smaller. That’ll make it easier to panelize them efficiently.

It’s also possible that the U.S. housing market will shift toward more multifamily construction. Numbeo publishes international home price-to-income ratios. By its calculations—which are a little different than the Joint Center’s—the current ratio in the U.S. is 3.99. In Canada, where buildable land has been in short supply for a long time, the ratio is 7.53. 

Last year 28.2% of U.S. housing starts were multifamily units. That’s normal for us—the average since 1959 is 28.7%. In Canada, multifamily’s share of total housing starts hasn’t been 28% since 1955. In 2020, nearly three out of four Canadian starts were multifamily units.

This is not a cautionary tale; Canadians are as satisfied with their homes as we are. But Americans definitely do not like the idea of living in multifamily housing. Four out of five say they want a single-family home.

As the need for affordability grows, the industry is likely to come under a whole lot of pressure to build single-family homes for middle-class families. That might boost panelization, but it could also be a boost for stick framing.

Builders clearly haven’t given up on the trades. When HIRL asked what they think is the long-term solution to a tight labor market, just 7% chose offsite construction. Three out of four said the answer is to recruit and train more tradespeople.

Which is great idea with one caveat: People have been trying to do exactly that for a long time with limited success.

Framing subcontractors have recently turned to an ancient recruiting technique that was proven effective centuries ago, but appears to have been forgotten in recent decades.

Yup—they’ve rediscovered the law of supply and demand. Average hourly wages for production and non-supervisory workers employed by framing subs were up 4.6% YoY as of December, while weekly earnings rose 8.6%. That’s more than a healthy raise; the Consumer Price Index (CPI-U) was up 1.3% last year.

Versus panelization, the value of stick framing is flexibility. It’s easier to fix design problems in the field and easy to make changes when buyers take a left turn. Maybe more important, stick framing makes construction costs flexible. You pay top dollar when framers are hard to find, then claw your money back when labor is plentiful.

That doesn’t mean there’s no future in prefabrication. Prefab can support framing crews rather than replacing them. Precut framing packages, optimized plate-cutting systems, and pre-assembled headers, corners, and partitions all reduce waste and cycle time without cutting framers out of the equation. Plus, the investment to do all those things is negligible compared with a panel plant.

The catch is that paying higher wages to attract workers to the trades adds to the cost of construction. The trick is boosting productivity enough to more than offset the increase.

Many people think that’s a lost cause. In fact, declining productivity in the trades is one of the key arguments for building in factories. The logic is that the trades are an unpopular career choice and always will be, and as a result, the workforce is aging and output will continue to fall.

It is well documented that dollar output per worker per hour in the trades has been falling for a long time. The problem is that cycle time has also fallen—dramatically, in fact—over the past 50 years. That suggests productivity is rising, especially when you consider that new home designs are far more complex than they used to be.

So what gives? It may be impossible to prove either way, but some assumptions about the trades appear to be just that.

In reality, framers are not aging. According to Census Bureau records, the median age of a carpenter in 1970 was 43.7. Today the median age is 41.8, says the Bureau of Labor Statistics.

More important, dollar output doesn’t necessarily reflect the performance of the trades. Output is also affected by inadequate pre-construction planning, sloppy supervision, and sketchy plans that force framers to waste time working out design details in the field. It might be that we’ve got a construction management problem, not a trade performance problem.

On top of everything else, panels may not even be faster than stick framing in the single-family market if you’ve got a skilled crew and the right floor plan.

As an example of the efficiency of building offsite, Entekra once touted a 3,300-square-foot dried-in shell erected in three days with a three-man crew. Assuming ten-hour days, that’s 36.67 square feet per man-hour.

In his memoir, the late Larry Haun, a long-time contributor to Fine Homebuilding and author of The Very Efficient Carpenter, recalled his days as a framer in the early 1950s. Haun and his two brothers routinely framed 1,100-square-foot houses in the San Fernando Valley at the rate of one dried-in shell per day. Assuming ten-hour days, that’s 36.67 square feet per man-hour.

Yes, those houses were simple rectangles with gable roofs. That pace probably also counts as peak performance for a stick-framing crew, although it’s worth noting that Haun and his brothers did it with 1x8 sheathing and hand-cut rafters, without pneumatics or power tools other than a 20-lb. Skil 77 worm-drive saw.

The fact is that tools, materials, and techniques have also evolved dramatically over the past 75 years. Whether you’ve got an average framing crew that is closely supervised or a top-notch crew with average supervision, building a durable home today is easier, faster, and more foolproof than it has ever been. 

It’s true that construction technology is in its infancy. As contech tools evolve, it may be that building offsite will someday be the more cost-effective method.

In the meantime, stick framing is hardly the five-alarm fire some say it is.

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