Pandemic Effects: Supply Chain, Market Fundamentals, and Affordability

We are all deeply aware of the impact that lumber prices and shortages are having on the cost of construction and the knock-on effect on the cost of housing. This is just one of many supply chain impacts. The pandemic has revealed in stark detail the frail nature of our global supply chain. The reality is that we are highly unlikely to see a change in the nature of production any time soon.

By most experts’ analyses, we should expect to see lumber alone impacted for another eighteen months. Other key areas of the homebuilding supply chain will recover at varying rates. What we do not know is what long-term effects these disruptions will have on supply chains. What effect will the race for substitutions have on the system overall? Some? None?  

Across virtually the entire U.S., we face deficits in housing supply. Depending on which experts one looks to, data supports there is an undersupply of housing between 3.8 million units on the low side and 6.8 million units on the high side. This undersupply has been growing steadily for two decades. With the current pace of building, we can expect the undersupply number to increase. Where do we go from here in terms of meeting the demand of today and tomorrow?   

Denver area market fundamentals remain very strong. EnergyLogic tracks ready for sale inventory of our clients. Our data indicate that while numbers have recovered in recent weeks, there remains a very low number of ready-for-sale homes. Of course, that is but one metric that is open to some interpretation.

We also know, paradoxically, that we have seen periodic softening of permits pulled in most Front Range markets. We strongly believe this is not indicative of demand destruction but supply chain disruption, regardless of the interaction between the two. Of course, increasing prices do reduce demand, but the market is not signaling much of that yet.    

All of this paints a bleak picture for housing affordability. A justifiably risk-averse industry is positioned to meet the demand not just today but tomorrow. Generational demographics indicate that…

We are, of course, concerned about the near term but equally about the longer-term implications for affordability. Even if we look at pre-pandemic price escalation, we see a trend that doesn’t seem sustainable.

• At what point are enough buyers driven out of the market that we leave behind an entire generational or generational equivalent segment of the country left out of homeownership? 
• Which builders and what strategies will succeed in beyond the near term?
• Will build-to-rent increase its market share? 
• Will modular and prefabricated housing finally find their day in the sun?