The house on Barton Hills Drive is a custom build. The owners recently decided to tear down an older house on the property and build their dream home on the site.
When I walk through it in November, it’s still only a frame. Part of the roof is covered, but standing in some rooms and looking up, I can see the clear blue sky.
Builder KWEJ Construction LLC, which does business as Capital Construction Company, has done all the prep work. The company removed the old house, then scraped and cleaned the lot. Workers tied into the sewer line and the city water line. They poured the foundation. They outlined the future house in wood. Up next, the skeleton of the house will be filled out.
But the builders also contended with countless slowdowns and materials shortages, which have become the norm due to supply chain disruptions.
Foam, garage doors, manufactured wood — even the literal nuts and bolts used to build a home — have become harder for builders to get their hands on as prices rise and wait times are extended.
According to data from the Bureau of Labor Statistics, prices of residential construction inputs rose 14% between January and November 2021. From 2015 to 2020, the average annual increase was less than 2%. As costs skyrocket, small homebuilders are figuring out how to keep the lights on while making sure projects don't stall. Many are taking on new contracts to ensure cash flow, but not necessarily with great profit margins.
"There are plenty of builders out there who are robbing Peter to pay Paul, and they're gonna' get caught in a real bind if demand stops," said Ethan Jones, co-founder of Capital Construction.
Capital Construction, which builds homes in the $1 million to $5 million range, is a microcosm of the larger homebuilding industry — from the small custom builders to large-scale producers, everyone is struggling to get their hands on the materials needed to build a home. That has serious implications for the wider economy, as the entire Austin region grapples with an extreme shortage of housing.
Kelly Wunsch, one of the owners of Capital Construction, said the reality of the materials crisis hit him when he tried to order a garage door. What would normally take about two to three weeks has turned into a six-month wait.
Broken links in a global supply chain
The writing was on the wall for construction materials in spring 2021, when the lumber shortage dominated headlines even beyond the trade journals. Ultimately, that shortage was a harbinger of many more to come. Pandemic-related shutdowns led to order backlogs, and international shipping issues stretched timetables long beyond normal levels.
Shawn Fitzgerald, president of Thomas, a New York-based company that tracks demand for materials, said the causes for the current high prices and long wait times are compounding on each other.
“We’re dealing with supply chain challenges out of Covid, and now we have this massive backlog that we can't get the stuff for,” Fitzgerald said. “Even as you're getting the materials, the backlog continues to grow, because there's more demand on the front end because of the shift to remote work and people’s desire for new homes.”
According to Thomas, demand for cement was up 181% year over year as of late December. For external doors, 162%; for sliding doors, 126%. Demand for wooden windows was up 114%. Critical components such as lumber and plywood, which make up a massive portion of traditional homes, have also seen persistently high demand, each up around 40% year over year.
Fitzgerald said the supply chain issues will likely last for another 12 months or so, but he expects things to gradually ease during that period. The general shift toward domestic production — as opposed to relying on global supply chains — and companies’ shift to digitized processes could help ease the stress in the meantime.
Feeling the shortage strain
By November, construction at the house on Barton Hills Drive had been underway for close to 10 months, including the time it took to remove the old structure. The home now has an estimated completion date in August.
Part of the house is framed with engineered wood, which has been glued and pressed together to be extra strong. These slats of engineered wood are extremely important to the structural integrity of the house. Capital Construction Operations Manager James Talley calls them the “backbone.”
But they’re hard to come by now, as a glue shortage — caused in part by Texas' February 2021 winter storm that temporarily shuttered glue and resin factories — hobbles production and distribution.
In framing, the builders chose to use trusses, manufactured to support the weight of the roof. A small piece of metal called a gusset plate sits in the middle of each truss — hundreds and hundreds throughout the structure. The metal plates have nearly doubled in price in recent months.
"When you're buying a gusset plate at 50 cents, and then all of a sudden it's $1, and you're doing hundreds and hundreds of gusset plates, it adds up," Talley said.
Not only are metal products rising in price, but they’re also becoming harder to get. The awning at the back of the house needed a steel support beam, but the material was running three weeks late. The framers had to put up a makeshift wooden support, which they’ll have to remove once the metal materials come in.
“In building, you have a very strict sequence,” Talley said. “If the steel's held up, but you need that steel to move on to the next sequence, you have to get creative nowadays, more so than before. You can't just sit here and stop.”
Talley estimates that every day on the job site costs about $3,000. Workers, security cameras, fencing, portable toilets. The longer a project takes, the smaller the profit margin.
“You think to yourself, ‘What can I do to keep my project moving forward?’” Talley said.
The need for new housing
In the fight against declining affordability, a lack of new housing is a chief obstacle.
The median home prices increased nearly 30% in the Austin metro between January and November 2021, according to the Austin Board of Realtors. This staggering increase was in part the result of a similarly staggering dearth of housing. There was only 0.8 months of housing inventory in the region as of November, compared to a healthy market’s inventory of six months.
Contrary to what the current shortage might suggest, homebuilders in Austin have been extremely busy over the past decade. Austin posted one of the highest rates of housing permits issued in the country, just over 135,000 between 2011 and 2020, according to the National Association of Home Builders.
But this pace has not been enough to fill what some experts say is a shortage of millions of new homes nationwide since 2008. Zillow experts say it’s unlikely the national housing shortage shrinks by a significant margin in 2022.
Some experts say things may soon normalize for the new home market. According to HomesUSA, a Dallas-based real estate agency that does market analysis, new home listings increased in Austin from October to November. Active listings were also up in November, according to the agency’s data. All of this spells good news for Austin’s new home pipeline.
Custom homes, in particular, became popular during the pandemic, as people wanted to invest more into their indoor spaces while in quarantine. This means builders working overtime, often competing for available materials.
'Drinking from a fire hose'
Capital Construction has seven total employees: the two founders, Ethan Jones and Kelly Wunsch; three project managers, one operations manager and one construction quality manager. The company works with about 30 contractors per project.
Capital Construction works on fixed-price contracts, with some protections for rising costs, but not nearly enough to entirely insulate the company against price spikes. Jones said the company had to eat a lot of costs, shrinking profit margins and making it tougher to pay overhead.
Although the company’s leaders believe in the fixed-price model, they were forced to change the way they write contracts to allow for more variability in pricing.
“The reality is these price increases are coming so fast, and they're so steep, there's no way that we could continue to do that and still pay to keep the lights on,” Jones said.
He said it’s a hard thing to tell a client, who’s already putting hundreds of thousands of dollars into a project, that their costs could go up considerably at any moment. Wunsch said a focus on communicating with clients was critical to navigating the unpredictable price changes. Transparency means telling them up front that "price spikes could happen."
At the same time, demand for new houses has ballooned. Wunsch suspects people read the news about lumber prices going up and wanted to jump into the market before things got too dire. Capital Construction expanded its team to keep up with the project pipeline, using saved-up funds to keep business going while operating at a loss initially.
The company is now operating at a profit, but Jones said the past year has been like “drinking from a fire hose." The massive demand for housing has allowed small builders to keep treading water. If that demand were to suddenly drop, many builders would be left in the lurch.
Difficulties across the board
Capital Construction is one of dozens of custom homebuilders in the Austin area. By their nature, these companies tend to produce fewer homes than volume homebuilders.
In 2020, Giddens Homes closed on 102 homes, topping Austin Business Journal's list of custom builders ranked by volume. Some builders close on as few as four in one year. This means each home accounts for a massive portion of the companies’ costs and revenue.
“We're all in this together, but we're all struggling in it together too. It's very, very challenging right now,” said Keith Billington, senior new home advisor with Silverton Custom Homes, which had a project load of about 21 homes at the end of 2021.
He said the Austin-based company is wading through a huge amount of demand while trying to set prices that are a “moving target.” Choosing jobs, setting prices, designing homes, nailing down contracts and making sure the company actually makes money when it’s time to build — all of these steps in the process are newly challenging due to unpredictable materials prices.
“There are a lot of opportunities to make fatal mistakes if you’re not really careful,” Billington said.
To compensate for some of the uncertainty, Billington said the company has started to increase the length of time it estimates for construction. Like Capital Construction, Silverton has had to change the way it structures contracts. It now includes allowances for certain materials like lumber and cement.
Lakeway-based builder Legacy Communities focuses on boutique and infill properties. Philip Jalufka, president and CEO, said builders’ market outlook has become more realistic in the past year. He said business is leveling off from its peak, but companies still have to be discerning about what new projects they take on.
“The dynamics of the project have to be that much stronger,” he said.
Missing puzzle pieces
Capital Construction is working on another home in Northwest Hills. When I walk through it, it’s almost done. The delivery date has been pushed back a few times, but there’s light at the end of the tunnel.
There’s plastic sheeting covering the walls, some painting to do, some light fixtures still sitting on cargo ships off the coast of California. But all in all, it’s almost ready for inspection.
It’s been a long road to get to this point.
Builders dealt with delays in receiving angled glass panes for the windows. The house uses the same glass that's used on storefronts and commercial buildings, and with all the crane activity downtown, they had to wait for the unique glass to come in. They boarded up the empty places where the windows would be and kept moving, unable to delay the drywall process any further.
They ran into issues with flooring — some of the boards were not what the buyer wanted, so the installer went through and culled the ones that didn't work. But the builder had to make sure there was enough wood to finish the stairs, leaving some of the upstairs space without wood flooring while the supplier fixed the issue.
The appliances, too, posed a problem. Talley said they used to be able to call up producers and order things like a refrigerator or a dishwasher. Now, producers are so slammed, they're building things in batches. If you miss the first batch, you're stuck waiting until a whole new batch is produced before you get your unit.
“It's like you're trying to build this puzzle, but a couple of pieces are missing,” Talley said. “You assemble what you can and wait for them to show up.”
For homebuilders, those puzzle pieces have been shifting for the better part of a year. But with creativity and flexibility, builders are starting to glimpse the bigger picture: a way through trying times.
Dollar amount of custom homes closed in 2020
| Rank | Prior Rank | Company name |
|---|---|---|
1 | 1 | Giddens Homes |
2 | 2 | Grand Endeavor Homes |
3 | 3 | Heyl Homes Inc. |