Inflation, Worker Shortage & Omicron

2022 is starting out with the same craziness that we saw in 2021. Covid-19 all but shut down the entirety of the United States in 2020, including the construction industry even though it was categorized as essential service and its continued activity was encouraged. At the time, we were already experiencing a housing shortage and the reduction in building starts during 2020 turned that shortage into the crisis that we are experiencing today. Homeowners over the past couple years who were looking to build a new home or addition to their existing home found themselves questioning whether or not it was a good time to build, filled with the uncertainty that the Covid-19 pandemic offered and fearful of rising costs. Our small building company, along with our peers, saw clients and potential clients shy away from projects that they had planned, and some even permitted, only to come back a year or more later to move forward with their project and to realize significant cost increases, severe labor shortages and supply chain disruptions.

We believe that things will level out at some point, they always do. But for right now, the high demand for housing across the country coupled with the labor shortage and other disruptions has placed tremendous upward pressure on the cost of materials and labor for any project. That is what we call inflation, and it is real. When things do level out it will not mean a return to pre-pandemic normalization, but rather a calming of pricing pressures and a stabilization of the supply chain. The cost that we are seeing for construction projects today are the new normal. What it cost to build a project today is much higher that what it cost to build that same project in 2019, upwards of 25% more. This increase will not reverse itself back to earlier times, but the expectation is that it will cease to accelerate at the rate we have seen during the past 24 months. The fact of the matter is this, people need a place to live and people desire to improve the place where they live. A young and growing family of three who add another child to their home will need more space. A family who brings in an aging parent to live with them may need additional space to properly accommodate them. These are just two examples of the requirement for new space and are also the types of projects that we have been building during the pandemic.

The time is now. That is an age old adage that really applies to the construction market in today’s volatile time. Right now the mantra is “things are only going to cost more if you wait”. The problem is that, currently, things could cost a whole lot more if you wait. We will know that the market is beginning to level out when we begin to see a deceleration in upward pricing pressures or changes being made that will cause the supply and demand components to begin to shift closer to equalization. The inflation that we are currently experiencing is projected to actually help us move toward this leveling out. Even amidst all of this chaos, Omicron the incredible demand, pricing volatility, etc., the one thing that we desperately need to fix is the labor shortage. If we can get this part of the puzzle leveled out, then we will really be on to a strong march toward the big picture leveling out. Inflation is not limited to the construction industry, no no no, it spreads out to touch all facets of consumer spending. Add this to other worldly turmoil, such as war, and you get higher prices at the grocery store, higher fuel costs, clothing your kiddos costs more, you get the picture. When the household expenses increase, sooner or later the pocket book gets stretched and we look for new ways to cover the costs. With so many Americans sitting on the sidelines and not participating in the labor market, the question becomes how long can you hold out. Inflation will continue to rise until the labor shortage is abated and we have the manpower that we need to get the job done.

It is sometimes painful to see the costs that we have to pay for materials today. Especially when you are accustomed to paying three dollars for a two by four and you now pay more than twice that amount. Things just cost more than they used in our line of work and that is the new normal. It can be said that those homeowner’s who remained committed to their projects early on during the pandemic and those who went ahead and pulled the trigger despite the chaotic environment got lucky. Perhaps luck does have something to do with it, after all nobody has a crystal ball, but that does not change the fact that there are many more homeowners that have project needs and space requirements today that they did not have two or three years ago. They need a new house or addition today, not yesterday, which puts them in the “new normal” construction market. Now, the silver lining is, there is always a silver lining (right?), mortgage rates have been historically low during this crazy time and property values also saw significant increases. People have significantly more value in their home right now and have access to low cost capital. Both of these components factor in favorably when planning a new construction project. When things level out as we settle into what ever our new normal is, we will also most likely see higher interest rates and the rate of appreciation on our homes will slow down. So, even with future stabilization in construction costs, easing inflation and and an ample workforce being all positives for the industry in terms of creating and maintaining a sustainable balance, it just means that the cost of any given construction project will not increase as fast over time. Anyone who has studied economics understands the the value of a dollar today is worth more than the value of a dollar in the future. If you are thinking about planning a new construction project, then the time is now.

NOTE: We routinely scan and read many construction industry publications and news sources to ensure that we are knowledgeable about the current markets and to stay on top of our game. Chris is a closet economics junkie, having studied economics at Mary Washington College, now University of Mary Washington, and thoroughly enjoys his continued study of economic phenomenon. He has embedded a great article that provides additional information and details about the 2022 Construction Forecast.