Like various other unpredictable pandemic-driven fluctuations, domestic demand for home goods has been stronger than predicted yet hampered by increased material and supply chain costs. Millions of people stuck inside their homes ordered new appliances because they had surplus discretionary income from not dining out and traveling. At a larger scale, commercial builders around the country are building new homes and multifamily, or repurposing other spaces into housing. Suppliers simply can’t output the needed building materials due to raw material and labor shortages. And both buyers and suppliers are struggling with increased transportation costs.
Is it real, or pandemic panic?
The prelude to this happened early into the COVID-19 pandemic, with mass frenzy around hand sanitizer, toilet paper, and basic food staple shortages. That could be chalked up mostly to consumer panic buying. However, in the second year of the pandemic, shortages are based on lack of available product and are being seen across appliance manufacturers, flooring companies, and anything that requires lumber or steel. Most recently, headlines have announced a shortage of shipping containers. In short, the supply chain has been overstressed in many different places and ways -- and now it’s broken.
What this means to the residential housing investor
Even if a property is an amazing bargain, that doesn’t mean the profit will be what you project based on similar past projects -- especially if you typically exit on a very compressed time horizon.
Whether your business is rehab and rent or fix-and-flip, the residential renovation process will be more expensive than it was pre-COVID-19 and likely have a longer timeline. You may be able to alleviate this through creating workarounds, i.e., finding wood substitutes, or switching from large material suppliers with overseas factories to smaller, local companies that produce domestically. But that sort of hands-on problem-solving work adds an additional time cost in itself and may prevent you from taking on as many projects as you normally would.
You may need to further adjust if your contractors follow COVID-19 safety guidelines. Since they often work in close quarters, the very basic “if you feel sick, stay home” guidance is as prudent in this industry as it is in manufacturing plants. And a crew a few workers down is not going to progress on the same timeline.
However, with no national enhanced safety standards, counties and cities often come up with their own -- definitely something to check into before investing in a new market. Also, be mindful that OSHA’s January 2021 revised workplace safety guidelines may not be the final word, as OSHA is currently considering, under executive order from President Biden, whether to create emergency temporary workplace standards.
Finally, prepare for an extra hit to your budget due to spiking transportation costs.
The bottom line
Should all of this discourage people from investing in single-family or multifamily projects? Not necessarily. In fact, some say the time is ideal, because mortgage rates are still low, demand for housing is high, and there’s an influx of cash from corporate buyers in certain hot markets.
If you can find properties that require little renovation or you’ve figured out how to renovate using readily available materials and a bare-bones crew, you could find plenty of opportunity for the next few years. This is especially true if, as most people expect, there’s a steady growth in motivated sellers peaking when the COVID-19 foreclosure moratorium finally comes to an end.
So sure, be aggressive -- but also, mind the basics. No matter how high demand might be, you can’t flip or rent out a home that doesn’t have the walls done.