Why Materials Companies Will Underestimate Housing Demand This Year

Single family construction material revenue is predicted to rise by 25% next year, according to new research from John Burns Real Estate Consulting.

“Some very unique circumstances will likely cause building product companies to significantly underestimate demand this year, leading to even more shortages,” writes John Burns’ Todd Tomalak in a new analysis. “The building products companies that prepare for this will take significant market share in 2022.”

The firm predicts a 10% increase in single-family starts next year, and 11% more materials thanks primarily to delays from 2021 starts. It also forecasts a 1% decrease in materials due to slightly smaller homes being built, and a 5% uptick in prices.

Tomalak says most building products companies “rely heavily” on construction starts forecasts to ramp up production to meet next year’s demand.

“We are forecasting single-family starts to grow 10%, which matches our recent survey of almost 300 home builders, and isn’t too far from the consensus forecast,” he says. “However, we think material demand could grow by 20%+, even with starts growing 10%. Price hikes will add another 5%, increasing total single-family construction material demand 25%. This will be greater than the 10% increases in total residential spending dealers reported to us this year.”

Tomalak says dealers in John Burns’ survey appear to be planning and buying inventory based on an inaccurate expectation of growth.

So what does this mean for the industry/? Tomalak predicts “more wild price swings ahead,” which will be complicated by a backdrop of ever-worsening product shortages. (“We are seeing this already starting to happen in lumber,” he notes.). He also says there will be a “tremendous number” of building product companies who will “erroneously think they are gaining market share, because their sales are growing faster than starts.”

Because of that, Tomalak says, “builders and manufacturers with the best access to available products will be poised to outperform.”

Builder sentiment in the market for newly built single-family homes moved one point higher to 84 in December,  a 2021 peak, according to the NAHB/Wells Fargo Housing Market Index (HMI). 

“The most pressing issue for the housing sector remains lack of inventory,” NAHB Chief Economist Robert Dietz said in prepared remarks at the time. “Building has increased but the industry faces constraints, namely cost/availability of materials, labor and lots. And while 2021 single-family starts are expected to end the year 24% higher than the pre-Covid 2019 level, we expect higher interest rates in 2022 will put a damper on housing affordability.”