Homebuilders are desperate to build more homes as demand accelerates across the country though they can’t because they simply do not have enough workers.
The dearth in labor has squeezed homebuilders who have seen costs rise. It is the rise in labor costs in particular that has some construction firms wary. Forty-two percent of firms are worried about the rise of direct labor costs and 26 percent are worried about rising subcontractor costs, according to an Associated General Contractors of America (AGC) survey.
“It eats into my budget. On some projects, it can be anywhere from 5 to 10 percent of the labor costs,” said Mark Gillespie, president of Cincinnati, Ohio-based TMI Electric, a lighting and energy installation contractor. If he brings in $5 million of labor a year, he can lose half a million dollars (10 percent) in lost profit just so that he can pay workers.
In order to get projects done with fewer workers, Gillespie has had to increase workers’ hours, paying an overtime rate of 1.5 percent more than normal, and increasing wages by 5 to 10 percent in order to attract and retain labor.
“I’ve increased wages at a much greater rate than the GDP,” Gillespie quipped. The GDP posted a 0.7 percent annual rate gain in the first quarter of 2017, down from a 2.1 percent increase in the last quarter of 2016.
Meanwhile, homebuilders across the nation anticipate raising wages by 4.25 percent on average this year, an Engineering News-Record survey on hiring and anticipated salaries found.
The lack of labor has also forced firms to pay more for highly-skilled workers to do jobs that require less skill – jobs that would normally go to someone who is less skilled and can be paid less. “They are paying more than they would from a labor perspective,” Spenser Villwock, chief executive officer of Independent Electrical Contractors, said.
Contractors are also forced to turn down work in order to ensure that they complete projects on time and with fewer and less skilled workers, that pressure is intensified.
“When you’re trying to do something in a rush, you might also make a mistake. That affects the quality of construction and that can translate into fines and lawsuits,” said Anirban Basu, chief economist at the Association of Builders and Contractors. Some contracts have built-in penalties or fines for delayed projects, he added.
Costs from project delays can also add up. Firms are paying more in the form of extended construction loans, overtime pay, leasing fees, and materials.
In order to find an adequately trained workforce, Gillespie said he has had to train them from scratch. He spends around $10,000 to $15,000 per apprentice for four years and he typically trains around five to 10 apprentices at any given time. Although his dropout rate is very high – anywhere from 30 to 60 percent – he fears the alternative is relying on a contracting workforce that is leaving for retirement or for other professions.
“Everybody is going through this. Everybody’s costs are going up. My biggest concern is that we don’t develop an adequately trained workforce to install projects properly,” he said.
Expensive labor and its ancillary costs are causing firms to pass those costs onto the consumer. Close to 70 percent of homebuilders said that the labor shortage would force them to raise home prices, according to an NAHB/Wells Fargo survey.
With prices already rising rapidly for new homes and existing ones, it is threatening to price many out of the market.
“The labor shortage makes it more costly to build new homes and difficult to address demand for the lower one-third of market,” said Paul Emrath, vice president of housing policy research at the National Association of Home Builders (NAHB).
A majority of recent and prospective home buyers expect to pay less than $150,000 for a home, according to a 2015 Home Buyer Preferences survey. With such a low benchmark, rising prices for new homes is driving homebuyers into the market for existing homes instead thereby raising prices there. “It hurts affordability,” Emrath said.
Housing inventory is at a historic low, making affordability unattainable for many homebuyers. Homebuyers are spending 38.3 percent and 25.6 percent of their incomes on starter and trade-up homes, respectively, according to Trulia, which measured affordability by the share of incomes needed to purchase an average priced home relative to household income in a metropolitan area.
Furthermore, the Case Shiller National Home Price Index hit its fourth consecutive all-time high in February, posting a 5.8 percent year-over-year gain, up from 5.6 percent in the previous month. Economists and industry experts said that housing price appreciation will remain steady over the year.
“I suspect that in every region, some degree of price appreciation is due to the fact that delivery and construction is getting more expensive because of the labor shortage,” said Basu. However, he also admitted that growing demand is still remains a main driver in rising housing prices.
Burgeoning demand comes amid signs of an also improving economy. The economy picked up 211,000 jobs in April and the unemployment rate fell to 4.4 percent. This also helps boost the Federal Reserve Board’s commitment to raise the federal funds rate at least once more this year.
The gradual rate increases will eventually drive the 30-year-mortgage rate up to historical levels though it will also drive construction loans up.
As the economy gains steam, millennial homebuyers will be impacted most by the rising prices and rates, Emrath said, both financially and psychologically. This may dampen home buying in the long run.
“Millennial generations are starting to think that 3 or 4 percent is normal, but they might get sticker shock when they see something like 5 percent not having the historical experience or having been in the market of buying a home except when in an era of historically low interest rates,” Emrath said.