Research
Quarterly Trends Report

Industrials trends report Q2 2022: outlook for home builders as demand softens and supply constraints ease

  • Multi Asset
  • Industrials
  • North America

The past two years have been a rollercoaster for US homebuilding. The COVID-19 pandemic triggered a frenzied real estate market along with severe supply chain disruption, causing house prices to skyrocket. But easing lead times for key exterior materials paired with rising interest rates are now seemingly softening demand for residential homes.

While declining inventory levels were a feature of 2020/21, experts are now anticipating a steady return to pre-pandemic levels on the basis that supply chain constraints do not linger or deteriorate.1https://blog.altosresearch.com/housing-inventory-jumped-8-this-week

Improving supply delays and waning demand have been consistent themes across many Forum Interviews in Q2 2022. One specialist, speaking about the windows market in Austin, Texas, said demand has fallen “5-10% below where it has been in years past”. Meanwhile, builders are now experiencing a two-week delay from a peak of 10-14 weeks. “That’s just been over the last month, month and a half that this has all transpired, like someone flipped the switch and said, ‘Let’s get back to where we were’,” the executive at an Austin-based windows and siding company told us.

Garage doors have also been a major bottleneck for new homes over the past six months or so but experts have noted the industry has become less constrained, helping to speed up housing completions.2https://www.wsj.com/articles/supply-chain-issues-leave-new-homes-without-garage-doors-and-gutters-11641724201 “Garage doors specifically were hit hard because there are so many different value factors in the supply chain that were impacted, from foam, which is the key insulant within garage doors, so the polyurethane insulation, to steel price and actual steel shortages,” an executive at a Canadian garage doors specialist said. According to the Interview, the cost of materials from suppliers has increased by 90-94% over the last two years and “stubborn” shortages remain in the spring category. “It’s come off a bit recently, and as an example, our largest supplier, CHI, the one that was recently acquired, has largely fixed their spring problem, and they probably had it the worst for a period of time, so I think we’re seeing much of the materials issues really ease up as of late,” the expert added. Largely across the industry there are now eight-week timeframes for lead materials from a high of up to 25-26 weeks or longer, and compared with 10 business days pre-pandemic.  

A shortage of lumber and pricing volatility has also been a defining characteristic of the housing market over the past two years, with prices ranging from USD 259.8 in January 2020 to USD 1,544.5 in November 2021, and currently at around USD 650.3https://www.nasdaq.com/market-activity/commodities/lbs Contrary to prevailing views, an industry specialist we spoke to at the end of May on the lumber market anticipates robust housing demand over the next two to three years, with commercial and multi-family even heating up. However, the full impact of the Russia-Ukraine conflict has yet to unfold. “A good percentage of the European spruce we get, the logs come via Russia,” the executive at a Florida-based building materials supplier said. “I think there are going to be issues with spruce in general later in the summer… the impact of the wood side of it has not been felt because of… what was already in the pipeline.” The specialist also noted that in response to the softening residential market and tighter budgets, builders might modify floor plans and make smaller houses. Rising interest rates, they believe, will “knock the stupid out of the market”.

Reuters reported that permits for future builds hit a five-month low in April, pointing to a slowing housing market.4 https://www.reuters.com/business/us-building-permits-dive-april-housing-starts-fall-2022-05-18/ “The prices have hit a level where they’re just, quote, unquote, too high, and so the ultimate product is way too high per square foot, and so you’re going to see a slowdown,” a former manager at BlueLinx Corp told us. However, the specialist also noted that the industry is still catching up with constructions that did not get off the ground following the 2008-9 financial crisis, saying: “There’s plenty of room for homebuilding, it’s just the prices… [are] squeezing out a certain number of people.” So although 2022 could still be a strong year for homebuilding and distribution, next year’s outlook is harder to predict, given “we’re living in a very unstable world economy”. 

What could these trends mean for home builders? With so many factors at play, it is difficult to predict the extent to which housing demand could soften and in turn bring prices down – if at all. At present, however, it is possible that rising interest rates, coupled with a normalising supply environment, could push up levels of housing inventory – which could erode record levels of gross EBITDA margin that home builders are seeing today. 

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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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