The main photo is courtesy of Roombus, which showcases an interior view of Nest, their new smart house.

Key takeaways from the Economics & Building Trends panel from the 2022 IBS Express recap show, including: changing homebuyer preferences; supply chain issues; lumber pricing and housing affordability.

Besides producing the largest light construction building industry tradeshow in the United States – The International Builders’ Show (IBS) – the National Association of Home Builders (NAHB) also provides an invaluable one-day virtual broadcast, aptly named “IBS Express” that recaps key highlights and trends from this year’s main event.

The recap panel that especially peaked our interest was the Economics & Building Trends discussion that covered current developments in the home building and home buying markets, from leading industry experts.

The goal of the panel was to help industry members better understand what’s been happening in the home building industry, as well as what can be expected in the near future.

This year’s discussion focused on the challenges and opportunities that homeowners, homebuyers and homebuilders can expect for the remainder of 2022, whether buying, selling, building or renovating a home.

Here’s what we learned on homeownership trends that we have been witnessing that are addressing several of the challenges raised by the panelists. We conclude the article with closing comments based on our observations of home building and buying trends.

Table of Contents

 

Changes in Homebuyer Preferences Over the Past 3 Years

According to builders surveyed by the NAHB, homebuyers’ preferences have cycled back to the same features and characteristics that were demanded back in 2010, during the post-recession housing boom. For six years, 2010-2015, buyers demanded larger homes with more amenities, such as home offices, exercise rooms, and larger kitchens.

Rose Quint, AVP, Survey Research at the National Association of Home Builders (NAHB), stated that homebuilders are seeing a return of these preferences by today’s buyers, most likely driven by an increased amount of time being spent at home over the past two years.

Quint and her research team subdivided their results by generations, namely Baby Boomer, GenX, and Millennial homebuyers, and concluded that these generations can actually agree on a few things:

Almost 80% of builders have seen a current demand for home offices by all generations, as well as for the desire to build in the suburbsrather than in large city centers.

During the period from 2016 to 2019, builders noted that buyers wanted more cost-conscious building with fewer amenities, smaller lots, and smaller square footage. However, the pivot point of 2020-2021 is perhaps a result of spending more time “in residence” and recognizing the need for more comfort, privacy and functionality at home.

Quint opines that this shift to larger homes and exterior features, such as porches and decks, are preferences that will persist, representing a new period of growth beginning to take hold in the current home buying market.

Key Highlights of Changing Homebuyer Preferences

  • Homebuyers are demanding larger homes with more amenities
  • Home offices are in demand by all generations
  • An increasing number of homebuyers are preferring the suburbs across all generations
  • Preferences for larger homes and exterior features will persist

 

Supply Chain Issues and Lumber Prices

With the increased demand for larger homes and more amenities, challenging issues arose and accelerated – in particular, supply chain bottlenecks – during the 2020-2021 pivot period. Dr. Robert Dietz, SVP & Chief Economist at the NAHB, stated that builders have three major concerns with which they must contend:

 

Lumber Production Was Curtailed While Demand Unexpectedly Surged

Lumber prices have been volatile over the last two years, as most lumber suppliers curtailed their production in response to worldwide lockdowns, anticipating economic slowdown and uncertainty in the marketplace.

In contrast, homebuyers and home remodelers began projects in earnest, especially since working from home became the norm and homeowners wanted more functionality and utility out of their homes. Decreased lumber production with increased consumer demand created a crisis that the lumber industry did not foresee.

In the first half of 2022, lumber prices are again increasing due to supply chain bottlenecks, as domestic lumber production in the US has always lagged home construction. This result is causing some builders to place housing projects on hold.

 

Increased Tariffs on Canadian Lumber that is in High Demand

Combine this supply issue with the increase – nearly doubling – of tariffs on foreign lumber, on which the US is highly dependent, and you have a perfect storm for yet another surge in lumber pricing. In May 2021, the US Commerce Department raised tariffs on Canadian softwood lumber imports from the previous 8.9% to 17.9%.

 

Shortage of Skilled Construction Labor

Dietz states that on top of the supply and tariff issues, the skilled labor shortage is another factor contributing to the increase in home building costs. He states that despite overall labor market improvements, there is still a 300,000 person skilled-labor shortage that currently prevails.

On a cautious note, Dietz stated:

“There is some expectation that maybe on the supply chain issues that we will see some improvement, at least this is what the Federal Reserve hopes will happen.”

He continued that:

“Builders should be prepared that we will begin to see double digit gains in construction material costs, such as lumber, and ongoing delays in material deliveries, which have extended construction cycle times four to eight weeks.”

 

Key Highlights of Supply Chain Issues and Lumber Prices

  • Lumber production was curtailed while demand for lumber unexpectedly surged
  • US construction firms increased their reliance on Canadian lumber, while tariffs on Canadian lumber dramatically increased
  • A perennial shortage of skilled construction labor is contributing to the increase in construction costs
  • Supply chain issues will continue to delay the delivery of materials, which will push schedules out

 

Rising Mortgage Interest Rates

Dietz went on to predict that his forecast models have the Federal Reserve raising interest rates four times in 2022, which will ultimately affect mortgage interest rates. He predicts that interest rates will average 4% putting upward pressure on the cost of borrowing, for home purchases and remodeling, by the end of 2022.

As a case in point, Dietz suggests looking back at Q2 in 2018, which was the last time the US saw a rate tightening cycle which ultimately forced mortgage rates into the 5% level. This created a softening in the housing market, which he expects will start to create some challenges in Q2 and Q3 of 2022.

Key Highlights of Rising Mortgage Interest Rates

  • NAHB’s Chief Economist, Robert Dietz predicts that the Federal Reserve will raise interest rates four times in 2022, which will impact mortgage rates
  • The Housing Market will start to feel softening as early in Q2 and Q3 of 2022

 

How Housing Affordability is Being Addressed

Despite the forewarnings and pessimism that Dietz presented, John Hunt, Chief Analyst & Principal at MarketNsight, suggested a return to 2016 might be the solution to housing affordability issues:

“Today’s builders are trying to do higher density building, not because they are greedy but because they are trying to do affordability.“

Hunt is suggesting that builders are shifting their focus by building four homes on a lot that would have only seen one home during the post-recession boom years. By decreasing lot sizing, while simultaneously decreasing home square footage and amenities, Hunt believes this higher density building will benefit the millennial consumer base, as they represent 50% of the mortgage originations market.

 

Baby Boomers Are Competing with Millennials

A conundrum is that Baby Boomers are competing with Millennials in the home market, as the former is looking to downsize from 3,500+ square foot homes to something more manageable in the 2,000 square foot market.

Millennials, many of whom are purchasing their first homes, are also contributing to the housing crisis, as they are not adding inventory, since many are leaving rental units or their parents’ homes.

Hunt believes that zoning trends are going the wrong way with current increased square footage minimums, and that there will need to be a different mindset in terms of regulations to create enough inventory to assuage demand.

Hunt added that housing affordability issues will be better addressed with new perspectives, to be held primarily by the Gen Z and Millennial groups, as they assume roles in city and state government by becoming county commissioners and city council members, for example.

His theory is that these generations will fix affordability issues much like they have “brought retail to its knees” – meaning that they will bring about a new way of doing things that better meets their needs.

According to Hunt, we are already seeing cities interested in affordability as single-family lots are being subdivided to create more homes on a typical single-family lot. He believes that communities with the tightest zoning restrictions will be penalized in the long run if they choose to ignore the affordability issue.

Market forces will eventually play a role in affordability, as we are already seeing the desire by many age groups to migrate toward the suburbs, in order to buy where they can afford. The increasing mobility of the average buyer (fueled by the growing adoption of virtual workforces) is also a contributing factor, as consumers now have the ability to shop around, as they are no longer tied to a particular region for employment.

 

Second Tier Cities are Booming

The panel acknowledged that second tier cities around major cities are booming, as consumers are discovering that quality of life is better than in many big cities.

Even employers are endeavoring to help their employees achieve more affordable housing, as Elon Musk cited Austin’s lower cost of living as one of the issues that caused him to move Tesla from California to Texas in December 2021.

The dearth of housing inventory will affect Millennials the most as they have reached their peak years of home buying and Baby Boomers are not moving out of their larger homes, as in the past. The current trend of Baby Boomers remaining in their homes is yet another factor contributing to the housing crisis.

First-time homebuyers are being squeezed out of the buying market as Baby Boomers, who do decide to leave their large homes, have the luxury of equity, from selling their current home, and then outbidding first-time buyers, who lack today’s requisite financial resources to compete.

First-time homebuyers will be further challenged by an increase in mortgage interest rates that may essentially price them out of the home buying market.

 

An Aging Housing Stock Will Be Good for the Remodeling Industry

On a positive note, the panel was bullish on remodeling an existing home as an option, since available inventory is the largest issue in home affordability. Dietz commented that the typical age of the US housing stock is above 40 years old. With this advanced age, homes need to be updated to meet current preferences of homebuyers.

Aging housing stock that is classified as “tear down construction” represents 6% of single family building starts. Older homes that are smaller, less durable, and less energy-efficient need to be redeveloped by private home builders.

 

Purgula’s Take on Home Building & Buying Trends

Through our daily tracking of trends and companies that are delivering innovation within the broad space of homeownership, we are confident that many of the challenges mentioned during this panel are already being actively addressed.

Here are a few trends that have been making a positive impact on homeownership. You will notice that most, if not all, are closely interrelated with each other.

 

Pre-Sale Renovation Companies

A new generation of pre-sale renovation companies, such as Curbio, Revive, Renovation Sells and FlipSplit, are delivering the following benefits that address several market deficiencies:

  • Upgrading an aging housing stock to meet the needs of contemporary homebuyers
  • Helping homeowners to maximize their resale value with strategic renovations and upgrades
  • Providing move-in ready housing to homebuyers that do not want to make major upgrades after purchase
  • Reducing risk to home sellers by delivering consistent performance, a result of industry best practices centered around sales-focused upgrades, such as: market data; partnerships with local agents; integration with quality, local contractors; professional project management personnel and technology; volume pricing for materials
  • Leveraging equity to cover the costs of modernization that can be postponed until closing
  • Helping homeowners to flip their own homes to maximize the profit of their largest investment asset
  • Empowering retirees who especially need to maximize their sale price for long-term retirement planning

 

Multigenerational Living & Aging in Place

The panel failed to mention that a key reason that many Baby Boomers are holding on to their larger homes is that they prefer to age-in-place in their homes and towns in which they have grown accustomed  for many years. An increasing number of aging homeowners are reticent to move into assisted living facilities.

Here are benefits that Multigenerational Living and Aging In Place are currently providing:

  • Aging-In-Place remodels are key to enabling homeowners to remain safely in their preferred home and represent a growth sector for many high-end home remodelers
  • More families in the US are looking for multigenerational living arrangements which can foster healthier, safer and more cost-effective lifestyles
  • Multigenerational households can pool their financial resources, thus increasing their total buying power
  • Adult children are looking for safe living situations for their aging parents
  • Multigenerational Living and Aging In Place relate closely to ADUs, as some Baby Boomers have been building ADUs, so that they can downsize to a detached ADU apartment, while the families of their grown children can move into the main house
  • Group Aging In Place is also occurring where aging adults are looking to live with other compatible persons for increased safety, social interaction and affordability

 

The Strategic Importance of ADUs

Though ADUs (Accessory Dwelling Units) were briefly mentioned as method of increasing housing supply, the panel did not touch on the strategic importance of ADUs. We contend that prefab ADUs are at the center of the future of home building and homeownership for the following reasons:

  • State-of-the-art prefabrication facilities are addressing the following industry challenges:
    • Shortage of Skilled Labor: Prefab facilities lessen the reliance on scarce skilled professionals
    • Housing Affordability: Prefab innovators are building capabilities that are scalable, where homeowners can start small and then expand their home over time, affordably with plug-and-play construction, like Boxabl
    • Schedule Overruns: Controlled manufacturing and building environments lessen schedule overruns due to foul weather
    • More Durable Building Methods & Materials: Prefab home manufacturers are taking the lead in category of “Disaster Resistant Homes”
    • Energy Efficiency & Smart Technology: A few prefab ADU companies, such as Roombus, are reinventing the concept of what a “smart home” really is
  • ADUs are most commonly being built for housing an aging family member, to support a flexible version of multigenerational living
  • ADUs offer tremendous flexibility as they can serve many roles through the years: rental income; aging-in-place; home office; apartment for an adult offspring; guest house; housing for a full-time caregiver; and more
  • ADUs can make mortgages more affordable by using them for rental income

 

A Growing Virtual Workforce Looking to Purchase Land

We anticipate that the virtual workforce will continue to expand for many years to come, especially as members of Gen-Z and Gen-Y become leaders in business and government. As centralized, urban living arrangements become less important, homebuyers will continue to look externally for more land, flexibility and security.

With the increase of prefabricated ADUs, more first-time homebuyers are going to opt for large, inexpensive tracts of land and enter homeownership with an ADU (AKA tiny house). This new approach to homeownership will be to start small and then expand and scale on your existing lot.

We are confident as more workers become untethered geographically, their imaginations will fuel truly novel approaches to homeownership, including emerging methods of monetizing their land and homes.

 

Creative Purchasing Power for Homebuyers

As prospective first-time homebuyers face various challenges of entering the homeownership market, they are considering creative options that are emerging from companies specifically catering to the challenges of affordability, non-traditional homes and home-buying assistance.

For example, as awareness, interest and cultural acceptance of tiny houses has increased, prospective buyers have learned that financing a non-traditional home is not straightforward and historically has had fewer options. Examples of non-traditional homes include: tiny houses; mobile homes; prefabricated homes; ADUs; shipping containers; and of course, land!

However, both innovative financial services firms, as well as manufacturers of non-traditional homes are stepping in to meet the needs of this emerging category of homeowners. As historical comparables accumulate, we expect more traditional lending institutes will enter the market.

Existing homeowners have also struggled when needing to upgrade to larger homes for their growing families. A big challenge has been losing out to no-contingency, all cash offers. This situation has led to various Proptech/Fintech firms coming to the aid of homebuyers with versatile, streamlined programs that offer all cash buying power.

Another category of Proptech/Fintech firms that has emerged is helping renters become homeowners, such as Divvy. In Divvy’s case consumers are allowed to rent the home that they wish to buy, while saving for a down payment. Renters can then decide to buy the home from Divvy, when possible, or decide to exit the agreement.

 

Transformable Design

No matter what a homebuyer may be able to afford in terms of size, rooms, layout and amenities, Transformable Design will play an increasing role in expanding the functionality and value of homes. Just as smart home devices, like LED lighting, can have multiple settings for moods and times of day, transformable design can be used to seamlessly change spaces into different “personalities”, such as having a home office during day that turns into a social gathering space at night. Tiny houses and ADUs will continue to be great sources of creative transformable design.

     

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