“If you’re not making money in this market, you’re doing something wrong.”
by Don Fenley
The local real estate industry has a case of pandemic fatigue. While the rest of the economy was savaged by Coronavirus lockdowns, real estate saw unprecedented growth. The market is still robust, but there is a complication. Skyrocketing material costs, supply chain issues and labor shortages are to builders in today’s market what empty toilet paper shelves were to consumers during the early pandemic days.
Simply put, labor and supply chain issues mean today’s housing material manufacturers and builders cannot keep up with hyper demand. There are not enough trains and trucks carrying cargo fast enough to where it’s needed.
Yet even with that significant headwind, the story is hardly gloom and doom. Real estate is still a local economic powerhouse.
William Crumley, president of the Johnson City Area Homebuilders Association, has a pragmatic and optimistic assessment even though parts of the new home industry look like a hot mess. “It’s the best and worst of times to be a builder,” he said. “If you’re not making money in this market, you’re doing something wrong.”
Kelly Wolfe, Wolfe Development agrees, “We’re the busiest we’ve ever been,” but “even in these good times, things seem to be awfully difficult.”
There was a silver lining in mid-June. Lumber prices fell. Travis Patterson, Patterson Homes, reacted this way, “I’ve been tracking this closely to pass it along to our customers and new people I meet with. Finally, good news, lumber prices are coming down…sharply!” It is a welcome limited respite. It is limited because since April last year, lumber prices increased 300 percent. So even with the June relief, prices are still at a pre-pandemic high. And there is a new concern. Oriented Strand Board (OSB) – a type of manufactured plywood used in framing – prices are skyrocketing.
That and other issues have some builders pumping the brakes. Some are capping sales, so they will not deplete their inventory. Escalation clauses are becoming a common hedge against cost increases. Others are not talking to buyers until they are sheetrocking. Some foundations have been poured and sit waiting for a bruised distribution system to right itself. Monty Puckett, general manager of Builders First Source in Johnson City, was recently quoted saying items they have not had delivery issues with for the last 30 years are now question marks. “We’re not sure when the next arrival will be.” And Brian Sheffey, branch manager at Ferguson in Johnson City, told builders he is seeing delivery times of 12-14 weeks on fiberglass components and a 50 percent price increase in PVC pipe and fittings. He added he is shopping suppliers to keep the flow of appliances coming in the door.
Their comments spotlight a significant challenge for local vendors and builders. The pandemic ripped a hole in the illusion of a stable, resilient supply chain. “For the most part, the supply is grossly inadequate. Supply functions are not working due to a lack of resources. We’re cranking ahead full-speed and can’t keep up,” said Dale Akins, president of The Market Edge – an information service that provides leads to building materials suppliers and financial institutions. Add a labor shortage, and it is the perfect storm driving prices to new highs.
Sheffey’s and Puckett’s comments also shine a light on another struggling real estate sector – remodeling and renovations. Many of the local homes are a little older than other markets. And some builders have abandoned the renovation market to cash in on building homes. Some do-it-yourselfers have also backed off now that lockdowns are over.
Like the new home sector, remodeling is bucking the material costs and supply chain challenges. Shortages and extended deliveries are both testing remodelers’ planning muscles. Trade organizations predicted 2020 would be an OK year. That is not what happened. Many dealers were unprepared for the avalanche of business from homeowners with little else to do but devote their time and money to home improvements. The overall building materials industry saw growth shoot up $84 billion, and the home improvement retailers got their share. Their growth was up $24 billion.
Projections are that this year will be a good year, but nothing like 2020. And Crumley, whose firm is still in the remodeling trade, thinks some of the locals who backed off will return when the new home frenzy eases. “Remodeling has always been a refuge for builders to make money.”
The demand that drove real estate to new highs is not hard to explain. Home sales declined when the pandemic hit. But it was not as steep as the rest of the economy. Housing saw a classic “V-shaped” recovery. That is not the case for the rest of the economy. Instead, it is seeing a “K-shaped” recovery. Some businesses and individuals in the middle- and upper-income ranges have and continue doing well. Others, the lower leg of the K that relies on the lower-income employees and those low-income individuals themselves, have not shared in the recovery.
Pent-up demand left over from the Great Recession and the coming of home-buying age of millennials are two drivers. Millennials now nearly outnumber baby boomers in the Tri-Cities. There is also a tsunami of new residents. By late summer 2020, virtual tours and other home shopping and buying technologies were the norms. People who had been couped up and working from home had cabin fever. They were looking at their homes from a new perspective and did not like what they saw. They embraced the new real estate technologies. Those who did not lose their jobs did something about it. They bought new homes or used their time – and money – for renovations and upgrades.
The ongoing real estate boom keeps builders confident, but the stress of not being able to meet that demand and affordability is mitigating at that confidence.
Last year also saw the nation’s largest builder set up shop in northeast Tennessee. D.R. Horton has been, and continues to be, very active. Horton’s regional office did not respond to a request for an interview about how it sees the area market and its future role. A representative did say the firm is making plans and assessing opportunities but could not comment on “strategic” decisions. In some ways, Horton’s stake in northeast Tennessee has incentivized local builders to become more competitive. It has also given the region recognition as a lucrative new home market. “It validates things are going well. If they (D.R. Horton) are in your market, it’s a robust market with potential,” Wolfe said.
Clayton Homes is also a large area housing contender. Builder magazine ranked it 11th in the nation on its Builder 100 list. D.R. Horton was ranked No. 1.
Data from Clayton shows it has seen brisk local demand for both manufactured and modular homes. Last year manufactured and modular home sales equaled 26 percent of the region’s new home permits. During the first five months of this year sales are a little better than half of last year’s total.
Northeast Tennessee’s new home permits were up 12.3 percent last year. It looks like this year will see more growth. During the past four years builders have added a little more than 1,000 new homes a year. However, despite increasing demand, they are still performing just over half of the 2007 peak-year capacity. And the demand has not been just for average homes. The growth rate for high-end permits exceeded neighboring regions – Chattanooga, Asheville and Knoxville – for the past two years. A high-end home is defined by 4,000 square feet or more and a construction cost of $400,000 or more. It is another sign of the region’s attraction for those looking to build more home for less money.
There are ample examples of how new home demand is being met despite the supply chain, materials shortages and price challenges. Kingsport has made a concerted effort to increase its housing stock. City Economic Development Director John Rose says 1,500 lots in the city are now in some stage of development. Johnson City builders are meeting with city officials to explore ways to increase housings. Bristol has seen brisk multi-family developments with plans for single-family additions working in the background. And Washington County, Tenn., continues adding to its status as the region’s new home construction leader.
Farther west, new home construction in Greene County looks much like it does in the Tri-Cities. Jeff Idell, Idell Construction, said he gets calls every day. “They want to build.”
Marvin Egan, Gate City, says it is encouraging to see new home activity in southwest Virginia. Even though it is, “not like what we’re seeing in Bristol or Washington County.” Most of southwest Virginia’s new residential construction is infill for the retirement and relocation trend. Moody Analytics’ current report for SW Virginia’s recovery says it is likely to come at a slower pace than the rest of the state. “Tourism, local retail, restaurants, and hospitality are areas that are going to take longer to come back,” according to Stephen Moret, president and CEO of the Virginia Economic Development Partnership.
Egan’s firm does business in both southwest Virginia and northeast Tennessee. He says his firm is “absolutely swamped,” and, “I’m on a cost-plus basis.” Like other area builders, some of his business is on a wait-and-see basis; however, “I’m getting ready to break ground on a new spec home, and I have a new commercial site under construction.” Labor also weighs heavily on Egan’s watch list. Currently, he is running short-staffed. “I would hire five or six lead people and an experienced estimator right now if I could. Unfortunately, you can’t find anyone.”
The most current Bureau of Labor Statistics count shows 7,900 jobs in the local mining, logging, and construction sector. Most are construction jobs. The year before the Great Recession (2007), there were 11,600 jobs in that sector. Those jobs declined when the Great Recession hit. Many workers abandoned construction and headed for the Northwest where the oil industry was booming. Construction jobs have declined every year since 2016.
So far this year, the local labor market has added 2,800 jobs, and while wages are not improving as fast as new or existing home prices, they are gaining. The local market is still rated as affordable because the average worker has the buying power to purchase a median-priced home. The big question is the labor force participation rate and how many employees will return to the service sector jobs. That is especially true for the restaurant and retail industry. So far, it has been unstable. Trade association officials predict those sectors will be slow to return to recovery status and as many as 20 percent of those employed by restaurants before the pandemic will not return.
Doing something about the construction jobs shortage is not on the backburner. Post-secondary education institutions in Tennessee and Virginia are working to meet the business community’s mandate to produce more and better potential employees.
• The Tennessee Board of Regents recently approved a new construction technology program for the Tennessee College of Applied Technology in Elizabethton. It will be housed at North High School in Kingsport. Classes are supposed to begin in the fall semester. Course work will focus on residential trades. The course focus on the Elizabethton campus is more oriented on commercial skillsets.
• Construction, electrical and plumbing career paths are also part of the Mountain Empire Community College curriculum. And the college, like its other community college brethren, now has a mandate from the governor and General Assembly of the Commonwealth of Virginia for free tuition for career-path students and certificate programs.
The bottom line for the region’s residential construction industry is this: Today’s market is riddled by a plethora of contradictions and becoming more reliant on the rest of the economy, which is taxed by its own challenges. The constants are strong demand and the inability to meet it. While there are no red warning signs yet, there are yellow warning flags as the economy struggles for a foothold on a post-pandemic normal.