June 7, 2022
Supply chain disruptions have been stressing every aspect of the housing market for several years now. These shortages and delays affect all of us—whether we want to buy or build a home, sell one, or simply make renovations or repairs. Most of us don’t have the option to stay in place. We still need to buy, build, sell or update—and get on with our lives. Understanding what is causing the supply chain disruptions, however, is key in knowing how to navigate the challenges they present.
How Supply Chain Disruptions Affect the Housing Market
While COVID-19 and its effects have played havoc with every industry worldwide, it is but one of the challenges affecting the supply chains associated with the housing market. The housing market relies on the sale of established homes as well as the construction of new homes. Going into the COVID years, the US faced a housing shortage. In 2018, Freddie Mac placed the housing deficit at 2.5 million units. By the end of 2020, that deficit deepened to 3.8 million units and continues to flounder.
- Building relies on labor. Builders have been facing shortages of skilled manual laborers like framers and tradespeople since the housing industry bubble collapsed in 2008. Many workers took their skills to other professions and never looked back.
- Building also relies on raw materials—lumber specifically. Homes are framed and sheathed in lumber, and many of the components—floors, trim, doors and cabinetry—all rely on wood. Demand for a limited supply of lumber has been high. Prices spiked in May 2021, increasing 400 percent over the previous May. While prices have been slowly adjusting, supply remains limited due to harvesting limits, the finite number of mills and the technology involved to ensure that every board foot is optimized.
- Building takes time. Increased production times for both raw materials and manufactured goods, as well as increased transportation and fuel costs, make finishing a home time-consuming and costly.
Meanwhile, in December 2020, 30-year mortgage rates hit a low of 2.68 percent, according to Freddie Mac figures. People limited to their homes decided to improve them, and many renters decided they wanted to try out homeownership. However, when they started looking, they found a shortage of new homes available and few homeowners willing to sell. As a result, what has been available—finished homes or building materials—has exacted top dollar.
Buying a Home During Supply Chain Disruptions
When supplies are in short demand, the price of everything goes up. Even in areas where you might not expect it, the house that would have sold for $225,000 two years ago may now be listed in the $300K-and-up range. For buyers, choices may be more limited, but you still need to ensure that what you’re spending is worth what you’re buying. You need to make every penny, second and decision count.
- Don’t insist on a brand new home. New homes have been completed with materials, supplies, equipment and labor that commanded top dollar. The builder’s bottom line has increased substantially, so the selling figure needed to clear a profit has, too. While you may be tempted by new appliances, new flooring, and new everything, realize that unless it’s a custom-built home, everything is probably contractor-grade—often the bare minimum needed to meet code.
- Shop carefully for your mortgage. Lending institutions will use your credit history and current interest rate guidelines to determine the terms and conditions they will offer you on a mortgage. Half a percentage point in interest may not seem like a substantial sum. However, plug some figures into a mortgage calculator, and you’ll quickly see that every fraction of a percentage point makes a difference in your monthly payment amount, how much of that payment will go toward principal versus interest and the total dollar amount of interest you’ll pay over the course of the loan.
- Get pre-approved for a mortgage—not just pre-qualified. These terms can be confusing because they’re often used interchangeably.
- Procuring a mortgage preapproval letter means that you have made a formal application for a mortgage loan, that the lending institution completed a hard credit check and review of your financial history, and that the lender has agreed to issue a mortgage loan up to a certain amount of money under a certain set of terms and conditions.
- A mortgage prequalification letter is based on the information you provide to a lender but must be validated to become a preapproval. Prequalification is not a guarantee of approval.
Having a mortgage preapproval letter in hand means that you already have your finances in order to buy a home when you find the right one. In a tight market, the buyer with the money is the one who will secure the contract.
- Prepare for a longer, more discriminating house hunt. Finding a property with the features you need or want at an affordable price may take time and persistence. Many affordable properties may be targets for investors who buy quickly and with cash. Highly desirable properties in popular neighborhoods may sell before they even hit the MLS—Multiple Listing Service. Fantastic acreage may have an uninspiring house, while a great house may have little to no property at all. On the other hand, sellers may overprice properties and you may have to wait for price adjustments. Even after you find a home, negotiating the terms of the sale may take time, persistence, and any number of professional inspections and estimates.
Selling a Home During Supply Chain Disruptions
This is what can make a seller’s market. Demand is high while supply is low. However, it can also present challenges for moving a property.
- Buyers purchasing through a mortgage lender will need an appraisal. If the appraised value fails to meet or exceeds the purchase price, the deal may not go through.
- Federally administered mortgage programs often require home inspections as part of the appraisal process to ensure that the property is safe, functional and sanitary. Problems identified during the loan process must be fixed before closing. This is usually the seller’s responsibility. Likewise, buyers with conventional mortgages may choose to have a home inspection and require repairs or maintenance before closing.
- Delayed or deferred maintenance can be a deal-breaker. It can label your home as a “fixer-upper” rather than the highly desired “move-in ready” home.
Building or Renovating During Supply Chain Disruptions
Building or renovating in a low-supply, high-demand market is challenging but not impossible. If you’ve already begun or have maintenance necessary to maintain your property’s structural or functional integrity, you don’t have much choice but to complete the project.
- Budget more money than you hope you’ll need. If you over-budget, you can pay yourself back at the end. Count on most prices remaining elevated or increasing even if some do normalize.
- Account for delays, wait time and even downtime. Some materials may simply not be available in your area. Supplies as basic as 2x4s, treated plywood or 4x4s may be spoken for before they ever arrive. Manufactured stone cladding, for example, may not arrive for months.
- Explore alternate resources and suppliers. You may need to opt for the exterior cladding you can get or the HVAC system that’s available. You may have to choose a more common standard shingle over a pricier architectural one or vice versa. Driving a distance to pick things up yourself may save considerable shipping costs.
- Consider DIY-ing what you can. Some tasks you may be able to do yourself—painting or even laying engineered wood flooring or ceramic tile. However, for tasks that must be completed to code or involve home systems like electrical service or plumbing, schedule contractors well in advance and ensure that all supplies needed will be available.
La Cap Can Help
Disruptions to our logistics and supply chains are not only inconvenient but also costly. However, life must go on. We all need a place to live, and we want it to be as beautiful and comfortable as possible. If you’re ready to buy a home, sell a home, or renovate or build a home, reach out to our mortgage and finance experts. La Capitol Federal Credit Union has loan products to help you through every stage of homeownership and keep you financially secure.