Breakdowns in market processes can provoke violent price swings.

By David F. Seiders

The volume of housing production has been quite strong this year despite a dramatic slowdown in overall economic growth and bona fide recession conditions in other major parts of the economy (especially manufacturing).

Low interest rates and strong house price increases have buoyed the demand for single-family homes, while evolving weakness in other parts of the economy, including commercial construction, has freed up supplies of labor and materials that constituted serious bottlenecks for housing in the late 1990s and even last year. But many builders still have a lot of trouble getting building lots, and that's a problem that will persist as long as the housing market remains strong.

Labor and materials

The NAHB conducted a national survey of nearly 400 single-family home builders in July to find out what has happened to various supply bottlenecks they have been facing in recent years. Until recently, shortages of skilled labor had posed a serious bottleneck for at least four-fifths of the builders, but only 43 percent said that labor was still a problem in July. This issue remains relatively serious in the Northeast, however, where nearly two-thirds of builders continue to complain about labor shortages.

Only 6 percent of the builders currently complain of bottlenecks in the markets for building materials, down considerably from earlier surveys. Indeed, more than nine-tenths of survey respondents said there are no shortages of lumber, plywood, OSB, wallboard, insulation, cement/concrete, roofing materials, or a variety of other materials.

Clay bricks are about the only major material in significantly short supply, reported by about 30 percent of builders nationally and 37 percent in the Northeast and Midwest where usage of clay brick is relatively common. But even brick shortages are easing, as productive capacity has been added by the brick industry and demands from the commercial construction market have been softening. Early last year, 60 percent (nationally) complained of brick shortages.


The most dramatic building materials supply turnaround is the gypsum wallboard market. Early last year, 70 percent of single-family home builders complained about wallboard shortages. But in our July survey, only 9 percent cited shortages. The same kind of swing, on a smaller scale, has occurred in the market for insulation, where only 8 percent of builders now talk of shortages following response rates around 40 percent early last year and in 1999.

Shortages and bottlenecks involve breakdowns in market processes and can provoke violent swings in prices. In the gypsum wallboard market, producer prices jumped by nearly 40 percent during the 1998-1999 period, but these prices have plummeted since early last year to the lowest level since 1995. Sharp swings have also occurred in the market for insulation, and those prices are now down to 1998 levels. Only brick prices have shown a persistent upward trend, consistent with our survey results regarding shortages. But there seems to be some evidence of a slowdown in price changes, at least at the producer level.

Framing lumber has been in a class of its own when it comes to price volatility, partly because lumber is a commodity traded on international markets. Lumber prices spiked up sharply during the first five months of this year before falling back in June and July. In our July survey, only 4 percent of builders mentioned shortages of framing lumber, and none described these as serious.

Red herring

While labor and materials shortages have been easing, bottlenecks associated with development approvals and the production of finished lots have remained serious. In our survey, 43 percent said the approval process in their markets is a real bottleneck, and 31 percent complained of shortages of building lots. The frequency of such responses is similar to those found in a series of NAHB surveys conducted in recent years.

The market for developable land, of course, is hardly the economist's model of a perfect market. Slow-growth or no-growth initiatives in many jurisdictions place serious restrictions on the supply of land for development and abuse the rights of property owners who would like to make their land available at prices a free market would bear.

Unfortunately, these problems are likely to persist as long as the industry continues to meet strong demands for new housing units that are located where people really want to live. If resultant upward pressures on lot prices force development patterns that buyers do not prefer, and if the courts fail to uphold private property rights, the political process may be the only recourse for consumers and housing producers.