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LBM's 'Pig in a Python' Moment: You're Busy Now, but Big Trouble May Be Coming in Some Markets

We all know LBM dealers nationwide will see demand slow from the often-robust sales we're seeing now, but now we're beginning to identify some markets that can expect to suffer a far more dramatic--and painful--decline than others.

The size of the precipice can be gauged by comparing a current indicator (February's year-over-year percentage increase in units currently under construction) to a future indicator (the year-over-year difference in new home sales). These numbers come from a March 16 webinar put on by Zonda, the housing data service.

In San Antonio, builders were putting up 130% more homes in February than they were in February 2022, but at the same time were selling 30% fewer houses. In Phoenix, units under construction were 92% up but home sales were down 49%.

Zonda's spot-check of 27 markets across the country found far less contrast in other areas, probably because both selling activity and the ability to build more homes peaked prior to February 2022. Take Atlanta, where construction activity year-over-year already is down 12% and new-home sales have fallen a relatively low 27%. Nashville, TN, is at parity: Both home construction and new-home sales are down 8% year-over-year.

In markets where construction is higher but new sales are lower than their February 2022 benchmarks, you could say dealers are seeing "pig in a python" conditions: The combination of higher sales and slower construction speeds has produced a visible bulge in housing's construction tract. Dealers are busy now because they're still working on that bulge. But once those homes under construction are digested, so to speak, dealers in many markets can expect far less to dine on.

How long might that take? Speaking nationally, there were 734,000 single-family homes under construction in February and 77,100 completed, so it would take 9.5 months to finish all those homes. The average time of construction in all 2022 was 8.3 months, the Census Bureau reports.

Meanwhile, looking toward the python's mouth, there were 31.6% fewer single-family housing starts in February 2023 than in February 2022. And in January, the number of single-family building permits issued was 36.4% below the same month last year.

Ali Wolf, Zonda's chief economist, pointed Webb Analytics to another factor worth considering: How many homes under construction have been sold? The chart above from Wolf shows that, according to a Zonda survey, 43% of the builders responding (most of them big production builders) said no more than 60% of the homes they had under construction in February were under contract with buyers. If prospective homeowners don't come through with purchases--at a time when mortgage rates are so high--then builders will be stuck with existing homes and thus less interest in ordering up new ones.

These aren't problems in every market, and these numbers don't threaten dealers that get most of their sales from custom builders and high-end remodelers; anecdotal evidence suggests those business segments remains robust. LBM dealers and hardware stores dependent on DIYers could face more challenges, given reports of increased consumer debt.

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