As U.S. homebuilding surges, smaller contractors face extra challenges

Homebuilding is taking off across the country. But not all builders are feeling the effects of the boom. In major metro areas, problems with supply chains and the labor market are making it more difficult for smaller contractors and companies to meet the demand, the Wall Street Journal reports.

The systematic supply shortage in the U.S. housing market has been acutely highlighted over the past year. The country is estimated to be short by several million homes. But cultural and market shifts during COVID have driven the demand for housing up to historic levels, despite the outstanding shortfall.

Homebuilding has surged accordingly to meet this demand but only in the face of issues posed by broken supply chains and economic uncertainty.

This is best seen by looking at the price of lumber. Disruption of the supply chains during COVID have caused lumber prices to rollercoaster wildly over the last two years. After rising to four times its historical average in May, lumber futures have dropped back down.

Another issue is in the labor market. Job growth in the economy overall has been somewhat slow, but in private construction there is a major deficit. According to the Associated Builders and Contractors trade association, the industry is short by 430,000 workers. The private construction sector shrunk from 8.4 million jobs in 2019 to 7.8 million in 2020.

This lack of workers has in turn driven up demand for subcontractors. Small contracting companies often have to work with subcontractors in order to complete jobs. The tight labor market has driven up the rates charged by subcontractors. Smaller companies without the resources fail to lockdown projects that larger companies can then pick up.

Thus, major construction companies have done very well and are currently in a strong position. Lennar Corp., for instance, reported earnings of $831.4 million in the second quarter of this year. This is up 61% from the same period last year.

Another major builder, KB Home, have had to cut back on some of their year end projections due to supply chain issues. But even so, they are still on track to construct around 14,000 homes in 2021, according to CEO Jeffrey Mezger. Overall, larger companies can scale much better and are thus better equipped to handle the particular challenges posed by the current market.

This reflects a shift in the distribution of labor in the home building sector. According to the National Association of Home Builders, the percentage of new homes closed by the top 10 largest builders in the country has grown significantly over the last decade. In 2012, only 24% of homes were completed by one of the ten largest companies. By 2019, this number had grown to 30%, and it is only being compounded now.

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