Why the Housing Shortage Is Good News for Construction

4 min read • Aug 08, 2021 • Barry Eitel

The housing market is one sector where the booms and shocks launched by the COVID-19 pandemic have been felt most acutely. The fight to buy homes regularly makes the national news, and building materials hit eye-watering new prices amid supply shortages.

The new normal has led to some intriguing and frustrating trends—work-from-home tech employees from the San Francisco Bay Area seem to be driving up home prices in Idaho exurbs, for example.

At the same time, America is experiencing a homebuilding boom that hasn’t been seen in decades. This explosion in construction rates is partly due to the housing shortage. It is also linked to trends that date back to when the housing market crashed in 2008 and even before.

Single-family home construction starts were more than 1 million in 2020, the first time such a number had been reached since 2007, according to Bloomberg CityLab. Apartment building construction is nearing levels that haven’t been seen since the 1980s.

During the first year of the pandemic, demand for lumber and other building materials surged, but suppliers misjudged the situation. This caused a painful situation where the price of lumber rose to an all-time peak of more than $1,690 per 1,000 board feet in May 2021—in March 2020, this price was only $240. By the summer of 2021, lumber prices crashed back down to below $600. This drop is allowing the building surge to continue its rapid growth.

“In the industry, there’s some kind of palpable sense of relief that we’ve gotten through this extraordinarily difficult time,” Barry LePatner, CEO of construction sector analyst firm Insights+, said to US News and World Reports. He also noted, “we’ve got a ways to go before the supply chain is healing.”

However, even though building material prices are coming back down to earth, the construction sector is facing another challenge—a labor shortage.

“This is probably the biggest threat to the industry going forward,” LePatner warned.

Again, several trends are at work. There is an overall labor shortage across many sectors of the economy as the US deals with the second year of the pandemic. Specifically for construction, though, newer generations have been geared more toward white-collar professions and college than trade school.

Of course, as the home construction sector continues to grow, it seems likely solutions will be found to the labor shortage because the industry will be so prosperous.

A notable aspect of the ongoing building boom is that it is happening in places you wouldn’t expect if you were making predictions in 2019. In 2020, home permits rose 9% in non-metro areas and 12% in the suburbs of large metro areas, according to CityLab. Of course, knowing how many professionals fled cities during the pandemic, this trend makes sense. But it appears to be a trend that will continue, especially as it seems the coronavirus pandemic is far from over. This is good news for builders around the nation.

“No matter what market you’re talking about, the furthest out in those areas are the strongest,” real estate consultant John Burns told CityLab. “Even renters want to move out and get more for their money.”

In the short term, the booming housing market is creating a lot of anxiety and snags for buyers, especially first-time buyers. Logically, this demand for homes necessitates more construction, and it seems that buyers will remain around for years as more of the millennial generation ages into desiring a house.

“As the pandemic sent families rushing from cities to the suburbs in search of more space and historically low mortgage rates made homeownership more feasible, the housing market got too hot for its own good,” explains Hillary Hoffower at Insider. “The increasing demand for homes outweighs the number of homes for sale—they’re flying off the market.”

Furthermore, this trend was visible before any of us had heard of COVID-19. In 2018, Trulia data said that starter homes represented only about 21% of available housing inventory in the US. A little over a year later, millions of people were battling each other over this already small slice of the housing market.

The Federal Reserve is rooting for the construction industry to meet this massive demand. In fact, the Fed appears to see the sector as a bulwark against the housing market, damaging the entire economy as it did in 2008.

“My hope would be that over time, housing builders can react to this demand and come up with more supply, and workers will come back to work in that industry,” Fed Chairman Jerome Powell said at an April 2021 press conference.

While there will definitely be challenges ahead, it appears that the housing construction market will be hot for years to come in almost all parts of the US as the demand for housing is apparently unquenchable, at least from the vantage point of the back half of 2021. 

Barry Eitel

Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.