Demand for larger living arrangements during the Covid-19 pandemic has fueled a single-family housing boom in the United States.  Higher demand for single-family homes along with a labor shortage and raw-material inflation has sent housing prices skyrocketing across most states.

The main driver of housing inflation in the U.S. has been the dearth of current inventory.  Available housing inventory in America hit a record low of 1.03 million units at the end of February 2021 and the number of homes on the market at the end of March 2021 was 52% lower than at the end of March 2020. 

The current inventory shortage has been primarily fueled by three factors:

1) Dovish Monetary Policy

The Federal Reserve’s low interest rate and accommodative monetary policy has allowed consumers to get access to capital at very low and generous financing terms.  This has created a surge in housing values not just in the United States, but in most other developed western economies. 

The Fed has a dual-mandate, to promote price stability which is a euphemism for keeping inflation intact and to encourage maximum employment.  While the Fed was starting to raise interest rates and become a bit more hawkish, less accommodative, before the Covid-19 pandemic, it reversed course once the pandemic hit to keep the U.S. economy in as solid of a financial position as possible during a precarious time for the country.

While this policy achieved its objective of limiting the severity of the Covid-19 induced U.S. recession especially when compared to other developed western economies, it has caused prices to rise above general inflation targets at least in the short-term.  This includes housing prices which have risen exponentially as many consumers are awash in cash from limiting discretionary spending during the pandemic and to the lower costs of capital that buyers have access to.  This newfound wealth for some consumers along with a desire to have more living space to work-from-home and to partake in outdoor activities during Covid has been a driver for single-family housing demand. 

2) Raw Material Shortages

In April U.S. housing starts fell by 9.5% compared to the previous month, even while demand continues to outpace supply.  This supply-demand mismatch has caused prices for new and existing homes to increase at their fastest clip in over 15 years.  About 15% of builders nationally have reported that they are putting down concrete foundations but are not framing houses.  Builders cannot procure raw materials to get their projects off the ground.

Lumber, one of the most important commodities in the home-building business, is in particularly short supply.  Even though lumber futures remain at more than twice their pre-pandemic record, lumber executives have been hesitant to ramp up capacity.  Ramping up capacity in the lumber industry is time-consuming and capital-intensive.  Many lumber executives are reticent to invest large sums of money into expanding production when they are not sure what the economy will look like in nine to twelve months once investments in scaled-up capacity finally come online. 

3) Labor Shortages

A combination of enhanced unemployment benefits, a country-wide skills mismatch between what employees can do and what employers need in their workers, and women being unable to return to the labor force, has resulted in a labor shortage, especially for blue-color jobs.  In April, the Labor Department reported that total non-farm payroll employment rose by 266,000 last month, which was far below the 1,000,000 number that most economists predicted.  The March jobs number was also revised down from 916,000 non-farm jobs added to the economy to a gain of 770,000 non-farm jobs. 

While many people still avoiding work out of fear of becoming infected by Covid-19 may play a small factor in the inability of employers to find workers, it is probably marginal at this point.  A stronger factor at play in the shortage of available workers is the more than two-million women who have stopped looking for work because of disruptions to child-care and schooling.  While the causes of America’s current labor shortage are undoubtedly complex and the result of multiple variables, the inability to find workers has trickled down to the construction industry. 

The construction industry currently faces a shortfall of 309,000 workers according to the Home Builders Institute with 60% of homebuilders reporting a worker shortage.  While the shortage of skilled workers in the construction industry can be traced directly to the 2008 financial crisis when 600,000 industry workers permanently left the construction business, the worker shortage has been accentuated by the Covid-19 pandemic.  Labor costs represent approximately 30-40% of the cost of a new home and as homebuilders are forced to pay workers more to get projects completed, they will also be forced to increase the prices of their homes in-order to breakeven, resulting in housing prices increasing further.   

While other factors are contributing to America’s single-family housing boom, central-bank policy, a raw-material shortage, and difficulty for builders to find labor are certainly three of the more important drivers.  Consumers should exhibit caution when buying homes, especially in metro’s with historically strong housing markets.  Once the Fed starts to turn off the spigot and builders are able to create inventory more easily, it may become a bit challenging for owners of both multifamily and single-family homes to get rid of their investments at the pricing they were hoping to.

A good rule of thumb, especially when investing in multifamily assets, is to always buy properties below their replacement costs.  This rule generally holds true for single-family housing as well.  This is one way to give investors a margin-of-safety should interest-rates raise and/or more supply comes onto the market.