Surprising Reason for Continued Supply Shortages

Surprising Reason for Continued Supply Shortages

Some very unique circumstances will likely cause building product companies to significantly underestimate demand this year, leading to even more shortages. The building products companies that prepare for this will take significant market share in 2022.

While single-family (SF) starts should increase 10%, we believe material demand will increase an additional 11%! All told, we expect SF construction material revenue to rise 25% next year, as follows:

  • 10% more starts
  • 11% more materials due primarily to timing delays from 2021 starts
  • -1% less materials due to slightly smaller homes
  • 5% higher prices.

Most building products companies rely heavily on construction starts forecasts to ramp up their plants and warehouses for 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.

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.

The additional demand is the result of the extended time it takes to build a home, which is causing builders to install materials later in the cycle. This will vary a lot by material of course because the builders are also ordering some materials earlier than usual due to the shortages. To make things worse, dealers in our survey appear to be planning (and buying inventory) based on an expectation of far less growth than we expect they will see.

What it means for the industry:

  1. More wild price swings, amid worsening product shortages—we are seeing this already starting to happen in lumber.
  2. A tremendous number of building product companies (essentially those who don’t read this analysis) will erroneously think they are gaining market share, because their sales is growing faster than starts.
  3. Builders and manufacturers with the best access to available products will be poised to outperform.

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