Housing Industry Outlook: What does the rest of 2022 look like? 

From rising interest rates to labor shortages, supply chain issues, U.S. courts revoking Brazilian plywood certifications to declining home sales, where are we really as an industry? Is it really all that bad all of the sudden? 

In my opinion in short, NO! In the grand scheme of it all, we as an industry are still in a very strong position. I see some speed bumps to come and a transition from residential construction carrying the load to multi-family but all in all we are still in a very good place. 

Impact of Mortgage Rates on the Housing Industry Outlook

Mortgage rates are over 5% causing a significant slowdown in mortgage applications but is this really a bad thing? The industry needed something to help slow it down but we need to be wise as to when we get it up and running again. At the rates we have been building, the cost to build affordable housing is out of the question. Just one year ago the 30-year mortgage rate was 2.99%! Home values have increased more in the last two years than in the previous eight. The high cost of construction combined with the highest interest rates we have seen in years is causing the cost of ownership to be too great for most who are out looking for a home today. 

The outlook for lower interest rates in the near future is low. With inflation currently at 8.3% and the value of the US dollar continuing to decline, most economists feel that rates will remain high for at least the rest of 2022 to mid-2023. Again, I ask the question, is this really a bad thing? The simple fact is we have a limited amount of capacity in every aspect of our industry. We have to find the right balance of production and sales in order to keep this machine under control and running well. 

Labor and Material Shortages

Labor shortages continue to cause us all concern. When you can go to your local fast food restaurant and earn $18 an hour sitting in air conditioning it is hard to get someone to learn a skilled trade, work out in the summer heat and build the American dream! Unemployment in the US hit 3.6 million in May 2022 which is the lowest it has been since February of 2020. People are working and that is a positive element to this equation but the increased cost of labor is driving the cost of the goods and services they are producing into a vicious inflationary cycle. 

The influx of substandard lumber materials has been a concern of ours for some time. We were wary of unlabeled dimensional lumber from Europe entering the market and took positions to protect our inventory and clients. Whenever demand is pushed there are inevitably those that will try to take advantage and sell an inferior product or falsely market a product. It is hard to verify the quality of the materials when they are stamped and stated to meet all of the standards set in the US construction industry. In a recent lawsuit, a Judge’s injunction stopped the sale of Brazilian plywood to the US. With lumber pricing dropping we may see plywood prices remain high compared to where they were pre COVID based on this recent court finding. 

While mortgage applications have slowed, the backlog residential builders have nationwide is still massive. In March, this deviation still rose 2.9%. It is estimated that we have 7-9 months of new construction starts based on the current backlog. We believe the industry will remain relatively strong and we will see a consistent new buyer pool in the market regardless of 5% mortgage rates. This consistent influx of new buyers alongside the current backlog will keep this machine moving for the next 12-14 months. 

Finding a New Normal

Forces greater than us are in play. We have to let cooler heads prevail and make the best decisions we each can for our businesses and the partnerships we have. The cost of inventory is still high and prices on the street will not reflect the lower cost for another quarter. As the backlog is eaten up, the FED needs to lower rates to allow the next economic tier of buyers to enter the market. Slowly turning the faucet on will allow the mills to maintain production so that the cost of framing materials levels off and we can find a new normal. Once this sets in all other housing components will follow and we can continue to build the American Dream!