Homebuilder Update: The homebuilder market is expected to produce even more units in 2021, despite rising costs of construction - May 2021
By Meg Scarbrough
The U.S. housing market had an unprecedented year in 2020, recording home unit sales at rates not seen since the mid-2000s, bolstered by low interest rates and a desire among Americans-many of whom began telecommuting amid the pandemic-to seek more suburban settings. But as consumer demand for housing grew, so too did pricing and competition from private equity firms, which have snapped up properties and added strain to the existing-home inventory.
At the end of March, total housing inventory on the market (both new and existing) amounted to 1.07 million units compared to 1.49 million a year ago, according to the National Association of Realtors, which was near-historic lows since the organization began tracking single-family home supply in 1982. With potential homeowners increasingly squeezed out by either lack of inventory or affordable options, an unexpected boon has arisen for homebuilders and the flooring companies that serve them. According to the National Association of Home Builders (NAHB), 60% of buyers would now prefer to buy a newly built home over an existing home, the largest share since 2007. Single-family starts were up 12% last year; the organization had actually only projected a 3% to 4% increase at the start of the year, pre-Covid.
Few could have predicted such a surge. In fact, when the second quarter hit, some contracting companies furloughed workers in anticipation of a slowdown. But builder confidence rebounded, hitting a record high in November, according to Robert Dietz, NAHB chief economist. And the April report from the NAHB shows homebuilder confidence is growing once more. The report says the “forecast is for ongoing gains for single-family construction in 2021, though at a slower growth rate than in 2020.” Dietz adds, “We expect a single-digit percent gain in 2021 over what was a very strong 2020.”
THE URBAN/SUBURBAN SHIFT
One of the biggest stories related to housing demand is that people are moving to the suburbs. According to the NAHB, “Prior to Covid-19, 26% of buyers would have preferred to buy their next home in an outlying suburb. Now, since the arrival of the pandemic, that share is 30%-the largest shift in preference for any location during this period.”
Dietz says, “The market where single-family housing was growing the fastest tended to be lower cost, lower-density,” noting that this was in markets that had been flat in previous years.
A contributing factor may be that as workers shifted from working in office spaces to telecommuting from home, it allowed them to move a little further out.
There’s also been a desire among homeowners to have a space that meets the new demands of working and schooling at home. In some cases, that means larger homes. Reports Builder Online, “Instead of the smaller, more efficient homes that were ascendant just 12 months ago, today’s homes need form and function to serve the entire family. While more space, ‘Zoom rooms’ and outdoor access are a few of the headline impacts of 2020, builders also say there’s been a fundamental shift in what home means to American buyers.” The NAHB does report that 21% of people-one out of five-now want larger homes as a result of Covid, with many of those having a teleworker or remote learner in the home.
And while homeowners are seeking spaces in which to work in the home, that doesn’t mean open floors plans are going away. In fact, the NAHB reports that 85% of homebuyers are still seeking open arrangements between the kitchen and the dining area. The change has been the focus outside of those spaces, according to Andy Hogan, CEO of FEI Group, the nation’s largest network of interior and exterior finish contractors. He says, “Homeowners have kids, and they’re going to want that office closed off so that they can have privacy,” so it’s more about thinking past the kitchen and living room.
MILLENNIALS MOVING IN
It should come as no surprise that another force shaping the single-family builder business is the Millennial generation, the oldest of whom hit 40 years old this year. The group represents 37% of homebuyers in the market as they see the value in investing versus paying rent, which in some cases is more expensive than a monthly mortgage payment for less space.
But like others in the market, Millennials are up against competition for existing homes and are increasingly seeking to build new ones.
Hogan says it’s putting a lot of pressure on builders to be able to pump out enough homes based on demand. He says, “You’ve got millions of Millennials that have been working professionally for ten years or so, and now they’re able to buy a home. However, with Millennials being young, the price point of the home is not typically up the food chain, generally in the $250,000 to $400,000 price range, depending on the market and region.”
The impact, he says, is that in an effort to churn out homes, a lot of which are spec homes, upgrades are limited. Hogan adds, “There’s very little upgrade ability and full flooring selections. Typically, you’ll have standard and then maybe a first- and second-level upgrade and that’s about it if they’re spec homes. So, it’s limiting profitability. The majority of homes that are being built are spec homes, whereas, seven or eight years ago, it was reversed and the majority of homes that were built were not spec and the upgrades back then were maximized.”
KEEPING UP WITH DEMAND
With these dynamics at play, contractors and flooring manufacturers that have a large builder market presence report that business has been brisk, but they note rising lumber costs and supply shortages pose ongoing challenges as they work to meet demand.
Dietz says structural lumber pricing hit a low in 2020, and as the pandemic took hold, sawmills were forced to slow or halt operations. In the months since, mills have struggled to catch back up, resulting in low supply, which has forced prices higher. Dietz says, “Since that time, prices are up 200%.” As a result, the cost to build new homes is going up. In late April, the average cost of a new single-family home had increased by $35,872, according to the NAHB.. He says, “Some of the housing affordability conditions are going to get tighter this year. It’s going to be challenging for builders to navigate some of those crosswinds.”
Shortages are having a secondary impact, as well: the length of time it takes to build a house. Says Hogan, “Sourcing of the goods has extended cycle times. If you look back to 2019, it would take hypothetically four months to build a home. Today, it could take anywhere between six to seven months to build a home.” So in a year in which demand for new housing is surging, builders are challenged to keep up. But Hogan says it might be a blessing in disguise, “If everything in sourcing was good right now, I think there’d be labor constraints and issues. But with the cycle time extended, it’s probably helped mitigate potential labor issues that could have come to light.” And it creates a backlog of business he anticipates will extend into 2022.
However, keeping new homes affordable will be key moving forward. Says Dan Butterfield, vice president of residential sales, Dal-Tile Corporation, “This year, we will experience a strong surge of material demand due to past months of strong builder sales. There are many variables that will determine the next couple of years. Although home inventories are expected to be low and home sales high, vendors will need to help builders contain escalating material costs, therefore ensuring home affordability. If home costs get too far out of reach, we perceive strong single-family sales will compress and multifamily housing will expand.”
WHAT’S GOING INTO NEW HOMES
Who chooses what flooring goes into a home remains up to builders, some of whom have go-to products and make decisions themselves as part of their packages.
But, says Scott Gibson, for the ones that do offer upgrades, he says consumers are looking for buzzwords like “waterproof,” and “they’re looking for patterned-type carpets because, as carpet continues to lose share inside the home, it gives the homeowner the ability to choose a more higher-end-looking style, like a patterned carpet for the bedrooms or for a flex room.”
Adds Mike Profilio, senior director of builder, multifamily for Dal-Tile Corporation, “Homebuyers are more informed about flooring product types, sustainability, indoor air quality, care and maintenance, etc., when making selections for their new home than ever before. Today’s homeowners are spending more time in their homes, so product traits that can help expand the living areas from interior and exterior space factor highly in the selection process.”
A report by the NAHB looked at the most sought-after features consumers want in their home. Among their essential or desired items were laundry rooms, ceiling fans, front porches and hardwood floors. Of those surveyed, 32% said hardwood is a must-have; 49% ranked it as desirable. Wider, longer hardwoods remain a popular upgrade among homeowners, but LVT is finding its niche in the builder business, thanks to its wood look and elevated design, durability and, of course, its waterproof story, and that’s chipping away at entry-level hardwood products.
The other benefit of LVT (largely SPC) for single-family homebuilders, Hogan says, is that aside from its waterproof story, it can be installed quickly, and there are fewer callbacks. He says, “No product is perfect, but the success of rigid core has exceeded my expectations.”
LVT’s popularity is so great, in fact, that Emser, one of the largest participants in the new builder business, will be launching its own LVT line called Emcore this year. The collection will feature 12 SKUs. Wendy Williams, national sales manager for Emser, notes the shift by Emser from its tile-only focus is a reaction to demands in the market, and she says the company may expand into other things “at some point to add to our quiver of arrows to satisfy even more needs.” She says the response to the LVT news by Emser’s customer base has been overwhelmingly positive.
But the desire for wood-look floors extends beyond LVT. Says Profilio, “Wood plank tile formats remain our most popular flooring product in the single-family space across all price levels.”
Amid the pandemic, cleanability and health have also come to the forefront of consumers’ minds. Williams notes, “Wellness is front and center for everyone-how you’re going to be able to maintain and clean things, really. I did an interview earlier this week for the commercial division, and they’re looking at cleanability in all the different senses, so tile really does come into play. And it is very easy to clean and very durable and hypoallergenic and all of those other great things.”
Profilio says, “We also continue to see a lot of activity on tile flooring products with different shapes and formats. While the 12”x24” format remains popular, we’re seeing increased activity with products that feature hexagon shapes and wider plank options. Marble designs have grown in popularity, with versions featuring both cool and warmer veining tones. Products that offer these marble designs in polished and matte finishes, as well as in a variety of formats-wall tile and unique mosaics-are trending up.”
And as homeowners seek spaces that add comfort to their homes due in part to pandemic sheltering, contractors and manufacturers say there’s been an increased demand in products that help extend the home into the outdoors.
Williams says exterior porcelain pavers are gaining attention. “They mimic a lot of what’s in the interior, so it’s almost like a seamless indoor/outdoor walkability kind of environment. If you have a contemporary tile on the inside, you tend to take that on the outside patio area.”
And it’s not just seating areas. Says Suzanne Zurfluh, director of design and trend for Esmer, “People are really looking at outdoor kitchens. Even outdoor showers are starting to come into play. People remember these resorts that they went to when they were still traveling, and now they want to kind of mimic that look in their home. We’re seeing it, whether it be little back walls, under patio covers, kitchens.” And she says the company is even expanding into offering pool tiles, as well.
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