Doubling Lumber Tariffs, Ongoing Labor Shortages Add to Inflation Concerns

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy. Financial markets and policymakers are indicating rising risks for the overall economy. Higher inflation is the top near-term concern, after the Consumer Price Index reported a 6.2% year-over-year gain in October — the largest increase in more than 30 years. While most economists, and the NAHB forecast, expect inflation to ease, the key question is how quickly. Our analysis, including effects from higher home construction costs and rising rents and owner costs, indicate that inflation will persist well into 2022 as the economy attempts to deal with increased deficits and ongoing supply-chain issues. How to tame inflation will be the top challenge for Federal Reserve Chair Powell, whom President Biden has selected for a second term as the top monetary policymaker. This responsibility is not just on the Fed however, as increased fiscal discipline by Congress and the administration is required to help reduce inflation risk. Additionally, the Commerce Department's economically inexplicable decision to double tariff rates on lumber is harmful for housing affordability as well as inflation. The ongoing labor shortage will further complicate this task, given an elevated level of open jobs and, within the residential construction sector specifically, a record number of builders reporting labor shortages. Despite these challenges — and the ongoing economic impacts of COVID and its variants (including the new omicron strain) — single-family builder confidence increased in November to a level of 83, per the NAHB/Wells Fargo HMI. However, some cooling in the market continues because of higher costs and inflation: Single-family starts declined almost 4% to an annual rate of 1.04 million, although starts are up almost 17% in 2021. Because of supply-chain issues, the count of single-family homes permitted but not started construction is up 43% from a year ago. New single-family home inventory is balanced at a 6.3-month supply; however, 28% of that inventory comprises homes that have not started construction. And home prices are up more than 17% from a year ago. This, in turn, has boosted the demand for single-family rental construction, which recorded its best quarter on record with 16,000 starts. The multifamily market continues to show strength. The NAHB Multifamily Production Index increased five points to a level of 53, moving solidly into positive territory. Moreover, the occupancy measure of the survey reached its highest level since 2003. If there is a weakness in the multifamily sector right now, it is the production of lower-density housing (2-to-4-unit properties), which is down 8% over the last year amid gains in most other home building segments. Even construction of built-for-sale condos showed some strength, reaching its highest level in the last five years during the third quarter. To subscribe for free to Eye on the Economy, please visit nahb.org.