Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Suppliers Unable To Keep Up With Housing Recovery

Written by Than Merrill

In response to the recent demand for more housing starts, U.S. homebuilders have increased material orders for seven consecutive quarters. All signs point to a significant step forward in the immediate housing recovery. However, a shortage of building supplies has facilitated the stagnation of construction starts. Suppliers are unable to keep up with the increasing demands made by contractors.

While the housing recovery is on the right track, regional building product makers have yet to experience a recovery of their own. Distributors that supply building materials to construction companies are currently operating in a much tighter credit market. Furthermore, said companies are working with a restricted workforce due to the housing market crash in 2007. In other words, building material companies have not recovered as well as the housing market.

Analysts say their long road to recovery has already been priced into the shares of these companies, some of which could be overpriced having ridden the success of the wider housing market rebound.

“It’s a really attractive industry from an economic perspective but … from a valuation perspective we find it less attractive,” said David Manger, a portfolio manager at AMI Investments and a former Masco shareholder.

In addition to established retail and building material outlets, various independent contractors are still feeling the wake of the last recession. Despite high unemployment rates in the construction sector and an increased need for their participation, many former carpenters and masons are hesitant about returning to the volatile industry after losing their jobs. The market may need to progress, more than it already has, for them to feel comfortable returning to their respective fields.

“Construction is not proceeding as fast as it might have had there been an ample supply of labor,” said Chad Crow, chief financial officer at Builders FirstSource Inc. “I think that will probably be the trend over the next year or two.”

The housing recovery has promoted new home starts, but the material providers have yet to be able to supply them. Twenty-two percent of homebuilders have reported a shortage of popular building products, a report published by the National Association of Home Builders in June acknowledged.

“In the past six months, we have had instances where we wanted to buy more materials than the companies could sell us,” said Crow.

A distinct lack of available credit has also contributed to the inability of suppliers to meet recent demand. The Federal Reserve has imposed stricter lending regulations as a result of the lenient practices that got us in this mess. Until building material suppliers are able to receive sufficient credit, the housing recovery may proceed, but at a slower rate than anticipated.