Grumbling supply chain slows home construction despite record demand in Utah County
Jim Collins, Vice President of M&T Bank Group branch in Holladay, mixed things up when he answered the phone. Jim was packing boxes in his car to move into the house he and his wife Nancy have almost finished building. “So if I’m out of breath that’s why,” Collins said.
Both have faces similar consequences brought about by the disruption of the global economy supply chain that many newer home builders can relate to. “We still don’t have our refrigerator which we ordered in November (2020),” Collins said. “We had to buy another refrigerator to use it in the meantime.”
Even as the Biden administration strives to ease pain at ports in Long Beach, Los Angeles and elsewhere, contractors are struggling to keep up with demand for home construction. Inventories are low, making it difficult for contractors to get the materials they need to build a house. Materials are purchased at much higher costs and received after longer waiting times compared to previous years.
The global supply chain does not have a reputation for being a delicate system. “It can take big shocks,” said Scott Webb, professor of global supply chain management at BYU. Despite this, the unpredictable nature of the COVID-19 pandemic has caused risk processes in the supply chain to collapse. The risk management processes have all been planned around predictable disasters.
Manufacturers have slowed or halted production during the pandemic to prevent the spread of the virus, but demand for materials has held up, according to Webb. The pandemic has done more damage to low-income jobs, such as factory work, than to higher-income jobs. People with higher income jobs always wanted new homes, but the workers who make new homes possible weren’t working.
Housing starts rose 13.5% in August 2021 from starts in August 2020, according to the United States Census Bureau.
“We made more loans in 2020 than in 2019 and we’re on track to make more loans in 2021 than in 2020,” Collins said. His company provides capital to builders in the form of loans to finance construction projects.
The slowdown in the rate of production coupled with the surge in demand for new housing has revealed weak links in the supply chain. Factories are now overwhelmed by the growing demand for building materials. As a result, production times and material costs stretched far beyond normal.
The demand for products is much higher than the supply inventory, and this imbalance drives up prices. Building materials such as wood, steel and plastics have all increased since the pandemic. The steel mill product price index jumped 111% between April 2020 and August 2021, according to the Bureau of Labor Statistics.
If a single critical component is produced slowly, it will suspend the entire project. Steel joists, a product that supports roofing, “can take months,” said Ken Simonson, chief economist at Associated General Contractors of America. “The roofing materials themselves (take) four to eight months. “
With the materials produced, the next (and perhaps the biggest) challenge is getting them to the construction site. Businesses in the United States rely on suppliers all over the world for materials and the shipping process is messy at the moment.
“Some things aren’t even produced in the United States, so you have to get it from Asia or Europe or some other place,” Simonson said. “This means that you are at the mercy of transport capacity, port capacity, rail or trucking capacity.
“On average, there are 25 ships off the Port of Los Angeles waiting to be unloaded,” Webb said. “What happened is this tightly orchestrated system on the shipping side of things, when you have people who couldn’t come to work because of COVID-19, it starts backing up the ships, the rail. , the whole shipping side just got so backed up. ”
The number of ships waiting to be moored changes daily, but the docks have been crowded since September. At times, more than 95 ships were waiting off the Port of Los Angeles and Long Beach, according to Business Insider.
Shipments from Asia, especially China, depend on West Coast ports to ship goods in the United States. Ships crowding these ports are filled with shipping containers that must be emptied and sent back to China and other countries where the product is ready to be transported.
Warehouse workers and truck drivers are both essential to the shipping process and are currently in short supply. These shipping complications highlight a need in the United States for more road and port capacity as well as for labor. It could be advantageous for the legislature to give more funding to infrastructure, Simonson explained.
“Workforce is a constant and we are seriously short of manpower,” said Steve Caldwell, senior executive of the Utah Valley Home Builders Association. “There aren’t enough people in the industry to meet the demand.
In March 2018, President Donald Trump set tariffs on steel and aluminum imported from all countries except Canada and Mexico. There is a 25% customs duty on imported steel and a 10% levy on aluminum. These products are both essential in the process of building a house. Tariffs on products like these and other building materials increase the cost of building a home, resulting in a tax on the consumer.
“There are items that are just hard to cross the border because there are so many tariff laws and quotas around them,” Webb said. “It slows down everything.”
Some countries, like Brazil and Argentina, have chosen quotas instead of US tariffs. Quotas set restrictions on how much of a material a country can export to the United States each year. Usually, quota limits are met at the start of the year, forcing US buyers to wait until the start of the next year to get the materials they need.
“The problem with tariffs and quotas is that they make the process unpredictable,” Webb said. “(Tariffs and quotas) certainly won’t get us out of this mess, in fact they probably exasperate the mess.”
Logistically, tariffs and quotas slow down the supply chain process. BYU professors of global supply chain management believe removing these tariffs could potentially jumpstart the supply chain back to normal.
“I think the biggest damage comes from the 25% tariff put in place by President Trump,” Simonson said. “The easiest and fastest step is for the president to be able to remove these tariffs.”
These challenges created a perfect storm for American entrepreneurs. The demand for housing without the supplies or labor to complete the work becomes unnecessary. In normal times, the supply chain behaves predictably. Contractors know how much materials cost and when to order them to get them on time. The lack of predictability in the supply chain has become a huge challenge for entrepreneurs.
When a contractor wins a contract for a house, they offer a firm price or “maximum guaranteed price” before starting the project. The contractors make their best estimate of the cost of the project. Unpredictable spikes in material costs have left many builders without sufficient funding to complete a home construction.
“Predictable costs are always better, even if they increase,” Collins said. “If they are increasing and are predictable, that’s okay. If they’re unpredictable, going up or down, that’s when it becomes difficult to determine what the price should be.
“It has become very expensive,” said Tom Foster, another professor of global supply chain at BYU. “It’s not unusual for a contractor to be halfway through a project and then come back and say, ‘This is going to cost you double what we originally contracted for. ”
There are several parts of the supply chain that go into building a house. Floors, lights, appliances, drywall, concrete and wood all suffered disruption that forced contractors to extend their loans. This makes it more difficult to build houses on time and on budget.
“It’s been really taxing and trying because (the entrepreneurs) can’t deliver on their promises or they can’t do it for the price they want,” Caldwell said. “It made it really difficult. “
Global supply chain professors at BYU believe the supply chain will not turn around until 2023. Removing stress from the supply chain is heavily dependent on the COVID-19 pandemic. Even if the chain is working well, peaks in the pandemic are causing plant closures and workers staying at home, causing more bottlenecks.
Americans always want new homes, but there is a systemic shortage of land and materials needed to build homes in the United States. The limited supply of housing and materials has increased the cost of building a house. Once costs hit a certain price, buyers will no longer be willing to pay and the buying frenzy will likely slow down so the supply chain can balance out again, Collins explained.