3 Things Real Estate Investors Need to Know About Labor and Materials Shortages in 2022 and Beyond
By Strategic Passive Investments
It seems strange to talk about the housing market cooling in 2022 when home prices rose almost 20 percent nationally during 2021. It seems even stranger to have this discussion when the most recent Fannie Mae home price forecast indicates prices will rise almost another 8 percent by the end of this year.
However, when you dig into the details of that home price forecast, you will see that the relative “cooling” starting to become a topic among savvy, forward-looking investors is a near certainty in 2022. Strangely, however, a diminishing interest in buying homes may not affect rising home prices significantly in the near term, due to massive labor and materials shortages that currently have no end in sight.
The issue, of course, is that real estate investors and homebuyers and renters all need certain real estate professionals to enable them to do business and, of course, live happily and healthily in their homes. Unfortunately, many of those real estate professionals are “missing” for a vast array of reasons we will explore shortly. Additionally, there is a wide-ranging materials shortage in the housing industry just as there is currently in just about every other industry.
While lumber prices have fallen slightly from record-setting pandemic-related highs, the issue of obtaining, processing, and transporting lumber and other building and new-construction materials has not gone away nor is it likely to do so.
In order to successfully navigate – or circumnavigate, as the case may be – labor and materials shortages in today’s marketplace, it is important to understand certain things about these shortages as they relate to housing and real estate investing specifically. These industries and sectors are unique; the workers and materials markets related to them are, as well.
Here are 3 things real estate investors need to know about labor and materials shortages in 2022 and beyond:
- Job satisfaction is not the issue.
In many employment sectors at present, workers are reporting that they simply no longer find the appeal of the paycheck associated with their job compelling enough to come into work in COVID-19 conditions. For food-service workers, for example, many in the industry say that they are not paid enough to accommodate the high and varied exposure associated with their positions. In the medical field, of course, we have heard so much about how medical practitioners at all levels are burning out from the aggression, frustration, tension, and anxiety associated with all areas of healthcare during the COVID-19 pandemic. The list goes on and on; since a large number of Americans saved at least part of their CARES Act and stimulus funds, many are finding themselves in the position – possibly for the first time – of having the luxury of being selective over the job to which they choose to return. Employers must offer higher wages, better benefits, and improved protection to attract workers.
For skilled labor shortage in construction and housing, however, job satisfaction does not appear to be the problem. In fact, according to a recent report from Angi, 83 percent of skilled workers in these fields “report satisfaction in their job choice.” Furthermore, opined Millionacres contributor Matthew Frankel, “Wages are also quite attractive; for example, the average general contractor earns 53 percent more than the U.S. average income.” Readers should note that simply earning more than other workers, on average, in other industries may not be the draw that Frankel implies. The Angi survey does not appear to directly address wage satisfaction.
Whether there is an issue with wages specifically or not, the fact remains that despite reported job satisfaction, 77 percent of skilled tradespeople say that labor shortage is a problem and about a third say they are turning down jobs because they cannot hire enough employees. They also say it is preventing them from “growing their businesses” and they “struggle” to hire skilled workers. Interestingly, only about a third of construction businesses post jobs online, which could be a way that competitive investors hoping to locate contractors for their own projects might be able to reach the 80 percent of Americans – in construction and otherwise – seeking a job in 2021 and in the New Year.
- There are going to be some unexpected shortages in 2022.
Most investors are fully aware that there are housing shortages in the single-family and multifamily residential sectors, but did you know that the labor and materials shortages are likely to create a dearth of units in other types of real estate as well? For example, student housing is likely to fall to an 11-year low by the end of next year due in large part to the increasing number of students opting to attend school remotely or who left college in 2020 to avoid the COVID-19 pandemic.
Renovation volumes are falling too – likely because there simply are not enough workers to get them done. In fact, Zillow recently announced it had suspended the Zillow Offers program for the remainder of 2021, if not longer. According to the announcement, the company needs time to work through a backlog of homes that need renovations and improvements before they are sold. Zillow said it would continue to purchase properties already under contract. Zillow COO Jeremy Wacksman said, “We have not been exempt from these market and capacity issues, and we now have an operational backlog for renovations and closings.” The announcement led to a sharp drop in stock prices although Zillow had not, at time of writing, adjusted its outlook.
- It’s Not Permanent.
Although labor and materials shortages definitely should be considered “headwinds” right now when it comes to construction and renovation in real estate, there are plenty of indications that the situation is not a permanent one. In fact, Marcus & Millichap is currently predicting the labor shortage issue will “abate” in 2022 as the economy continues to create new jobs. However, company analyst John Chang did warn that wage increases are likely to “stick” over the long run even as difficulties finding labor decline in the months ahead. “As of July, average hourly earnings were growing at 4 percent – about one-and-a-half times the normal rate,” Chang observed in a video on the topic. “Rising wages will stick with us on a long-term basis.”
Investors Will be Able to Adjust, but Flexibility is Important
Real estate investors will, as always, manage to figure out new and better ways to generate returns and revenue in the post-pandemic economy, but, as always, it will be important to keep an eye on trends both temporary and permanent. While not every trend lasts or becomes cyclical and embedded in our larger economy, reacting to changes appropriately as they occur will help keep your existing investments stable and your future investments optimized for the best returns possible.