HOUSING BOOM IN FULL SWING
Home construction at 14-year high, but increased costs, labor shortage, and unpredictable supply chain hampering industry
More single-family homes are being built in Michigan than at any point over the past 14 years, but increased labor and material costs combined with a lack of workers and an unpredictable supply chain are frustrating developers and buyers as the pandemic creates a perfect storm of crisis proportions.
According to the Home Builders Association of Michigan, the number of single-family residential permits in 2021 far outpaces any prior year dating to 2007. Through September, the latest month that data is available, 12,915 single-family residential permits had been issued statewide this year. That’s 40% higher than at the same point in 2020 and 20% higher than 2019, according to the U.S. Census Bureau.
Rhonda Gilbert, 65, and her husband are building a home in West Bloomfield, but months later her builder is still waiting on materials and laborers to complete the job.
“We started building in January, but we were supposed to start building in November 2020,” she said. “Our builders asked me if we wouldn’t mind waiting a few more months for lumber prices to come down, because at that point it was at its peak.”
Aside from escalating material costs, Gilbert said the greatest challenge has been the availability of skilled laborers and building materials.
“Everybody is so busy right now in terms of the trades,” she said. “It’s like herding cats. There’s still a lineup of things that are not done. I’m still waiting for kitchen cabinets.”
Bob Filka, president of the Home Builders Association of Michigan, said the increase in new single-family home construction indicates sustained buyer demand and a sustained ability to build at a time when housing inventory remains very low and buyer demand remains very high.
He added that the latest permit numbers are still far below pre-recession totals with homes under construction costing more to build and sold at a higher price. The average value of a new home permit is more than 13% higher than it was in September 2019.
“We’ve had more than a decade of a building environment where the vast majority of new homes and renovations that have been taking place are at the high end of the market. You really can’t make money as a builder much below $325,000 unless you can get greater density, which is often a challenge with local governments, ” Filka said.
In Oakland County, the average sales price of an existing single-family home is $392,000 compared to $355,000 in September 2020, a 10% increase, according to Realcomp. Through September 2021, 1,545 single-family permits had been issued, a 20% increase from the same period in 2020 when 1,281 permits were issued.
This year, around 42% of Oakland County’s new home construction is concentrated in Novi, Rochester Hills, Lyon Township, Troy and Orion Township.
According to data from the Home Builders Association of Southeast Michigan, Novi leads the way with 167 single-family residential permits issued through September, including 43 in September alone. Through the first nine months of 2021, the average sales price of an existing home in Novi was around $538,000, a 14% increase from the same time period in 2020.
The increased costs for permits, labor, and materials have created significant challenges for firsttime home buyers and others seeking more affordable housing.
Kathy Coon, a Realtor with Rochester Hills-based Real Living Great Lakes Real Estate, said the Oakland County and southeast Michigan market is more stable now than it was over the summer as more homes are for sale, but with e prices that remain higher than in past years.
“The new construction homes do come into the market at a much higher price point than the existing home market, which is limiting for some,” she said. “The cost of new construction homes rises as builder costs increase.”
In September, over $70.2 million was spent by developers nationwide on the construction of private, residential construction, which includes single-family homes, according to the U.S. Census Bureau. That is 20% higher than September 2020 and 39% higher than September 2019. This data includes the cost of labor and materials, architectural and engineering work, overhead costs, interest and taxes paid during construction, and contractor’s profits.
For Michigan home builders, material costs and lack of workers is not the only issue. Another challenge is the availability of materials and predicting when products will arrive at the build site.
“I was just talking to one of our members who builds 10 to 15 homes a year,” said Filka. “He’s booked out to 2023, so you’d think he’s super busy, but he hasn’t finished a project yet this year because he’s waiting on a door, he’s waiting on appliances, he’s waiting on other things. The products that you used to be able to get to your build site in a matter of days, now it’s months.”
Filka said some of those clients have been waiting an extended period of time to move in as that builder attempts to complete construction amid significant material delays.
As costs increase, developers stop building lower priced houses and focus on those with higher prices which can be sold for larger profits.
The average price of a newly-constructed home in southeast Michigan is $400,000 while the average sale price of an existing home is around $273,000, up from $249,000 in September 2020, according to Realcomp.
Charles Boulard, Novi’s community development director, said that as more new homes are built, city officials will need to make sure that city, county and state roadways can handle the increased traffic..
Michael Stoskopf, president of the Home Builders Association of Southeast Michigan, said the rise in construction permits is related to the lower inventory of existing homes for sale.
“But the level we are at is constrained by material cost increases from supply chain issues continuing as we exit the pandemic combined with the limited trade subcontractor base which is a continuing issue since the Great Recession,” he said.
And more larger-volume Michigan builders and developers are building houses without buyers, called speculative or spec homes which are built first then sold, that allow builders more flexibility for materials and labor costs while not having to deal with customers disappointed byto construction delays and escalating costs.
David Steuer, owner of Farmington Hills-based Steuer and Associates, said his company had been constructing build-to-suit or custom homes, which are homes built to a buyer’s specifications, but have pivoted towards speculative builds.
“That was a nice business plan, but the length of delays and material shortages means we have to be flexible and change,” he said. “If you build a speculative home, you’ll avoid all of that buyer letdown. The real estate market is strong enough that you’re not taking that much of a risk as a builder when building a speculative home.”
Steuer added that while there’s no shortage of buyers, there is a labor shortage.
“If you look at the profit margins of the publicly traded homebuilders they’re not going up,” he said. “In fact, in some cases, they’ve been shrinking. It’s a common misconception for a buyer to think that the builder makes a lot of money per home. At the end of the day, that really isn’t the case.”
Michigan industry professionals are predicting single-family home construction is at capacity because of the limited number of laborers and subcontractors, increasing land, construction, and regulatory-related costs, and the overall supply chain woes with builders often waiting months for certain materials needed to complete the construction of a home.
In order to build for a healthy, normal housing market, most economists are saying that Michigan is around 5,000 to 10,000 homes per year below its yearly historical average.
“For the last 14 years, we’ve under-built new homes,” said Filka. “Even though our numbers are higher this year, we’re still way behind where we need to be.”